15-Year Mortgage vs. 30-Year Mortgage

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.

  1. The interest rate is lower.
  2. 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.

Example 1

  • 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.  

Example 2

  • 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.