In the latest edition of the JW’s Financial Podcast, I mentioned an article asking the question if it was time to ditch the 30 year mortgage in favor of the 15 year mortgage. The 30 year mortgage has become the most popular mortgage because of the lower payment that it offers. But how much more do they really cost than a 15 year mortgage?
The biggest difference that jumps out when comparing the 15 year mortgage to the 30 year mortgage is the lower interest rate. Currently the average 15 year rate is about 3.78% compared to the 30 year rate of 4.54%. If we take those rates and use the median home price in American of ~$160,000 we come up with a 15 year mortgage payment of $1166 and a 30 year mortgage payment of $815 or a difference of $315 a month. However the interest you pay over the course of the loan for a 30 year mortgage is $133,000 compared to just $50,000 for a 15 year mortgage. That is a difference of $83,000 plus the fact that you are in debt for 15 years longer!
30 year mortgages are often appealing because of the lower payment as well as giving us the ability to buy bigger and pricier homes. However, over time the amount we pay in interest costs us significant amounts of money. That is why we recommend taking out the shorter mortgage terms. This might initially delay you living in your dream house. But instead it will allow you to be in a better financial position and get ahead financially by eliminating debt. So why not consider refinancing your mortgage to a 15 year note or decide to get serious and aggressively pay down your 30 year mortgage like a 15 year mortgage?