Until recently there has been no debate. Homeowners looking to finance their home by a long-shot chose the 30-year mortgage. It was remarkably more affordable. Today, the 15 year fixed mortgage is beginning to challenge the 30-year as it gains in popularity. The thought now is to minimize long-term interest costs as much as possible.
Mind Sets Are Changing
At the end of 2011, mortgage rates plummeted to the lowest levels on record. With economic strife becoming a repetitive theme, mortgage rates continue to fall. Recently 1 in 4 mortgage applicants refinanced their 30 year fixed rate to a 15 year fixed rate. Five years ago that figure was 1 in 20.
How It Works
The fundamentals are basically the same for each mortgage. You start with a loan balance, a non-changing interest rate and a monthly bank payment. The difference in the two mortgages is the period of time allotted for the loan to be paid back in full. Remember, you are compressing the same debt into half the time frame. The monthly payments will be approximately 48% higher.
Real Numbers
Here’s how it breaks down in actual numbers. A $600,000 fixed mortgage loan payment under a 30-year plan will break down to $2986 monthly. Under the 15-year mortgage the monthly payment would be $4410. That may seem counter-intuitive, but consider this; in one year under a 30-year mortgage, 31% of the payment will be applied toward principal. Under the 15-year mortgage, 63% of the payment will be applied to principal after one year. Long-term, that’s a huge amount of savings in interest payments. On that same $600,000 loan, the 15-year mortgage will require $281,000 less to be paid in interest.
Things to Consider
The savings in interest alone on the 15-year mortgage is huge. That’s a big motivator. But even with interest rates at an all time low and interest savings high, you need to remember that the higher payments last all 15 years. If financial difficulty caused you to not be able to make the higher payments, re-adjusting the mortgage would be difficult to do. If you can swing the higher payments then you can consider yourself mortgage free in 15 years, with a considerable amount of money saved on unnecessary interest payments for double that amount of time.
Consider the advantages and “fix” your mind resolving the Great Debate of refinancing.
