Wednesday, December 20, 2017

15 Year Mortgage vs 30 Year Mortgage

As a mortgage broker I get this question all the time. Here’s how I see it and for the most part it’s an individual decision each borrower must make based on their personal situation. What I do is educate my borrowers and give them the numbers to make their own conclusion.
When you are purchasing or refinancing it is wise to look at the 15-year mortgage. Advantages are many but primary it will save you thousand with a lower interest rate for the term of the loan. However, your payment is going to be higher than a 30-year mortgage because you are paying off the principal in half the time. If your goal is to pay off your mortgage and be mortgage free then this loan is a very attractive vehicle to get the job done.

Let me give you a common situation I come across quite a lot.  Say you are a thinking about retirement and you are about 15 to 20 years from retiring, you are in the highest earning period of your life. You have a retirement plan you are contributing to each month and the only thing you are not sure about, is how to pay your mortgage after retirement, because it won’t be paid off until long after you retire. You may have to sell your home… I say no way! Unless you want to of course but for many, staying in their home is a top priority. This is a perfect situation for a 15-year mortgage. To help you make the higher payment to get this accomplished you may need to see if you are 
over-funding your 401K or other retirement plan, you might be able to reduce it some to make up the difference. I am not advising you forgo your retirement plan or monthly contribution to do this. Just take a look at it and see if there is room for adjustments. You may find the money there. 
Planning for your housing during retirement is equally important and certainly paying off your mortgage sooner or by retirement age is going to be beneficial even if you decide later to sell.

There are many good reasons to refinance into a 15-year mortgage but the best one is savings by the thousands. It’s quite exciting to see that principal balance reducing very quickly.
Some people are fearful of the higher monthly obligation and tend to go with the 30-year mortgage. 
I can certainly understand this way of thinking. For this borrower I offer them a 15 or 20-year amortization table based on their 30-year rate and if they choose, they can make the payment each month that gets their mortgage paid in 15 or 20 years, but if something happens and they cannot make this payment they can always go back to the 30-year payment without any consequences from their lender. Most loans do not have a prepayment penalty. At least none I originate have a prepayment penalty. You are free to pay your balance down as you wish. This is a great alternative and for some a safer way to pay off your mortgage sooner. 

The national average and current rate for both the 15 and 30-year mortgage is;

Mtg Loan
30-yr Fixed
15-yr Fixed

Let me show you the difference in monthly payment based on a loan of $400,000 at the current rates and then I'll show you the amount of interest you will save over the term of the loan. 

30 Year Mortgage 
$400,000 @ 3.9% rate/4.03 APR = $1919.69 Monthly Principal/Interest Payment
Total Finance Charge for the term of the loan = $293,448.22 i.e interest you will pay on the loan over the life of the loan. 

15 Year Mortgage 
$400,000 @ 3.3%/3.47% APR = $2869.76 Monthly Principal/Interest Payment
Total Finance Charge for the term of the loan = $118,917.50 i.e. interest you will pay on the loan over the life of the loan. 

Total savings for 15 year vs 30 year = $174,530.72 

In my view I think it is almost always worth considering. Yes the payment is higher but the savings is real. Maybe consider how important it is for you and your family to cut back on your spending so you can manage the higher payment allowing you to save almost $175,000.. finding places where you can save is key and a strong look at your budget is well worth your time and effort. 

For anyone who would like a free analysis on your current mortgage or if you would like me to work up an amortization table on your current mortgage to pay it off sooner, please give me a call. 
808-457-2455 ...I will only need to current mortgage statement to do this. 

Thank you for visiting my blog, I encourage you to leave a comment or questions. Let me know if my blog has helped you. I would love to hear your thoughts and any ideas for future posts. 

Roxy Redenbaugh
ACMC Loan Consultant
Certified Mortgage Coach
Branch Manager
NMLS #269926
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