Fifteen Will Get You Three

By
Real Estate Agent with Tate Daniels Concierge Real Estate 72067

 

Fifteen Will Get You Three

 

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Freddie Mac chief economist, Frank Nothaft, says that affordability, stability and flexibility are the three reasons homebuyers overwhelmingly choose a 30 year term.  However, for those who can afford a higher payment, there are three additional reasons to choose a 15 year term: save interest, build equity and retire the debt sooner.

 

First-time buyers have a higher tendency to use a minimum down payment and are very concerned with affordable payments.  It is understandable that the majority of these buyers select 30 year, fixed-rate mortgages.

Consider a $200,000 mortgage at 30 year and 15 year terms with recent mortgage rates at 4.2% and 3.31% respectively. The payment is $433.15 less on the 30 year term but the interest rate being charged is higher.  The total interest paid by the borrower if each of the loans was retired would be almost three times more for the 30 year term.

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Another interesting thing about the 15 years mortgage is that more of the payment is going to principal than interest from the very first payment.  It would take over 13 years on the 30 year mortgage for the principal to exceed the interest allocation.

Some people might suggest getting a 30 year loan and making the payments as if they were on a 15 year loan.  That would certainly accelerate amortization and save interest. The real challenge is the discipline to actually make the payments on a consistent basis if you don’t have to.  Many experts cite that one of the benefits of homeownership is a forced savings that occurs due to the amortization that is not necessarily done by renters.

Posted by

Trey McCallie, SRES, ABR, e-PRO, SFR

Principal Broker

T|D & Associates Concierge Real Estate

859.312.7599 mobile

tdandassociates.com

Comments (2)

Jordon Wheeler
The Jordon Wheeler Group - Fairburn, GA
J W Group Real Estate Sales and Service

Hey Trey,

I like the analysis comparing the 15 year versus 30 year mortgages.  I am seeing more 15 year mortgages.

Jul 07, 2014 12:37 PM
Trey McCallie
Tate Daniels Concierge Real Estate - Lexington, KY
Excellence in Real Estate since 2003

Me too.  Our clients have become more conservative since the great Recession!

Jul 22, 2014 05:22 AM