Photo: Homes in a neighborhood. Taken from my iPhone.
I mentioned the importance of investing in a previous article and one of these investments is the purchase of a house. A house can be both a blessing and a curse. It will be a blessing if you are financially stable and can afford the extra costs that come with a house. It will be a curse if you are not prepared for little expenses that come up with a house. A house requires the home owner to fix all items that need to be fixed. So, if you are not financially stable, then a house can be a curse because it can push you further into debt.
Personally, I don’t like being in debt and I personally don’t like paying interest charges. A house is a big ticket item that my wife and I will purchase using a mortgage, but we will only take out a 15-year mortgage, because the math is just so obvious about how much you save when compared to a 30-year mortgage. There are two reasons why I prefer a 15-year mortgage.
- The interest rate is lower.
- The loan period is shorter, so you pay the house off faster.
Let’s look at a few examples to show you what I mean. I will use two rates for the mortgages. According to quicken loans, the rates for a 15-year mortgage is 3.125% and a for a 30-year mortgage it is 3.875%. So, we will use the same purchase price and the same down payment and calculate the monthly payment and the total cost to purchase.
- House Cost: $250,000
- Down Payment: $50,000 (20%)
- Total Loan Size: $200,000
In example 1, you will notice that the 15 year mortgage saved the home buyer $85,737.60. Also, you will notice that the monthly payment is not that much different. This difference is only $458. I would much rather spend $458 more a month on the mortgage than lose $85,737 over the course of 15 years. This is a huge amount of money to be throwing away at a bank. This home buyer also gets out of debt 15-years earlier than if they would have purchased a home on a 30-year mortgage. Can you believe that you would be throwing over $85,000 dollars away in 30 years by taking out a 30-year mortgage? It just makes too much sense to buy a home on a 15-year mortgage.
- House Cost: $150,000
- Down Payment: $30,000 (20%)
- Total Loan Size: $120,000
Once again, the numbers work out in the favor of the person who takes out a 15-year mortgage. They spend more monthly on the mortgage payment, but save a lot in interest. In this example the difference in total interest paid is $51,440.40. The 30-year interest is more than double the interest paid on the 15-year mortgage.
The reason that my wife and I have decided to take out only a 15 year mortgage is because we look at these numbers and see how much you can save by paying only a little bit extra each month. This is our opinion. Let me know if you have any other things that I should look at in making this decision.