Buy That House: 15 versus 30 Year Mortgage
Is it better to have debt for 15 years or for 30 years?
Since, generally speaking, debt is not a good thing, it would be better to eliminate a particular debt sooner rather than later, or within 15 years instead of 30 years. If a house is purchased for a certain amount and the choice is between a 15 year and a 30 year mortgage, then the total outlay to pay off the loan would be less by using the 15 year versus the 30 year. Take a look at the example below:
Loan Amount: $275,000; 5% Down Payment; Rate for a 15 year is typically lower than a 30 year.
--------------15 Year at 5.625%-----30 Year at 6.125%---Equity Difference
Pymt--------$2,265.27---------------$1,670.93------------
Balance:
Year 1------$262,979----------------$271,701--------------$8,722
Year 5------$207,542----------------$256,292--------------$48,750
Year 10----$118,234-----------------$230,899--------------$112,665
Year 15----Paid Off------------------$196,435--------------
What was not considered?
- Note that the monthly payment, in this example, is $594.34 less for the 30 year mortgage than for the 15 year mortgage. One can look at this in two ways; one, by using a 30 year mortgage, one can afford more house, since qualifications are based on the monthly payment; or two, for the same house, a 30 year mortgage will yield a lower monthly payment.
- If one opts for the 30 year mortgage, then one has this monthly difference to invest. Among the many possible investments, the money could be invested in the stock market or it could be used as extra principal for the mortgage. If the money were used as extra principal towards paying the mortgage every month over the course of the loan, then the mortgage would be paid off in about the same time as the 15 year loan, however if in any given month one wanted to use the money for another purpose, such as money towards a vacation, then they would have that option.
- Interest is tax deductible. If the loan is paid in 15 years, then that deduction is no longer available. The 30 year loan continues to provide that benefit.
- The equity in the home means nothing unless one can tap into it. This can be done by selling or by refinancing, which completely changes the mortgage picture.
The correct loan for any given individual varies depending upon their overall financial situation, but there is not an immediately obvious answer as to which loan is more appropriate without reviewing their entire situation.
Contact Ron Trzcinski at 410-935-5844 for more information.
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