When you’re shopping for a mortgage, the two most common fixed-rate mortgage terms you’ll come across are thirty years, and fifteen years. There are other options, sure, but those are the most common.
Fifteen years is a long time. So is thirty years.
Looking at today’s interest rates on both 30-year and 15-year loans, the 30-year rate right now (remember they change a lot) is 3.94%, while the 15-year rate is 3.24%. While the rate on the 30-year term is higher than the 15-year, the monthly payment is actually lower, because the term of the loan is longer. Confused yet? Let’s take a look at how it works out.
According to the New River Valley MLS, the average price of a home sold in Blacksburg VA in 2011 was $251657 – we’ll round down to $250000. (See what $250000 in Blacksburg gets you here). Now see that calculator to the right of this post, the one that says “Estimate Your Payment”? Let’s enter in a few variables to see what a 30-year loan vs. a 15-year loan looks like
- In Principal enter $250000
- In Interest enter 3.94% (for a 30-year loan)
- For Term choose 30 years
- In Down enter $50000 (meaning we’re taking on a $200000 loan)
- In Taxes enter $2000
- In Insurance enter $1000
- Hit Calculate
For a 30-year loan, the monthly payment (with the variables above) works out to $1197.92 a month (Disclosure – I’m not a lender. For a real lender, go here
). And if you go a little further down and click on Amortization Schedule
, you can see exactly how much of your monthly payment goes to pay interest, and how much of it goes to pay principal, each month. If you held the loan for the full 30 years? You’d pay a whopping $141253.83
in interest alone.
Using the same criteria as above on a 15-year loan raises your monthly payment to $1559.24 a month, an increase of almost 25% – that’s significant. But here’s where the value of a 15-year loan comes in. Click on Amortization Schedule again, and scroll to the bottom of the Interest column … $35662.97 is the total amount of the interest you’d pay by holding the loan for a full fifteen years, a savings of more than one hundred thousand dollars over a 30-year loan ($105590.86, to be exact).
Don’t like numbers, and need a visual? Here you go (courtesy of Quicken Loans
30-year Amortization Chart
15-year Amortization Chart
As you can see, it will take 12 years on the 30-year loan to get to a point where you’re paying more in principal than you are in interest, whereas on the 15-year loan you’ll start paying more in principal than in interest right away
. Of course, the likelihood of someone holding a mortgage for thirty years – or even fifteen years, is slim. But look at the savings over just five years (thanks to GoodMortgage.com
for the calculator):
If you have a 15-year mortgage you’ll have almost $37000 more in equity than if you had a 30-year mortgage, using the same variables as above.
See why, if you can build the payment into your monthly budget, a 15-year mortgage just makes sense?