When purchasing a new home, many buyers ask our gay realtors if they should take out a 15 or 30 year mortgage. If the 15 year is affordable, it’s always a better choice, and there are many good reasons why.
Generally speaking, 15-year mortgages charge less interest. For example, one popular mortgage lender offers a 30-year mortgage at 4.6 percent, whereas the interest on a 15-year loan is only 3.6 percent.
For a 30-year, $200,000 at mortgage at 4.6 percent, the amount paid is $369,000. A 15-year mortgage for $200,000 at 3.6 percent will cost you only $296,460. With a 15-year mortgage, your monthly payments will be slightly higher, but you will save $72,540 over the life of the loan.
For those who just can’t swing the higher monthly payment on a 15 year mortgage, there are other strategies that could help you save even more money and help you pay your house off even sooner, like paying more than the minimum requirement. Mortgage interest is calculated monthly. Every month, interest is calculated on the amount of principal you still owe. Every payment you make pays that interest, plus a certain amount of principal. Every dollar above your minimum payment you pay goes toward principal. This way, you are more quickly paying down the principal, and this reduces the interest you pay.
On a 15-year, $200,000 mortgage at 3.6 percent, paying an extra $100 per month shortens the time to pay off by 15 months and you will save an additional $5,319 in interest. Paying an extra $200 per month on the same mortgage means you will make your last payment 27 months earlier, and you will save $9,746 more.
How much extra should you pay? A good guideline might be to shoot for 25 percent of your monthly income. For example, a family making $100,000 per year has a monthly gross income of $8333. If that family were to pay 25 percent of that, $2083.00 every month towards their 15-year, $200,000 mortgage at 4 percent, they would be paying an extra $436 per month. That means that they would pay off their house in only 10 years and nine months, and they would save $17,745.
With benefits like these, it’s plain to see why many borrowers are taking out 15-year mortgages instead of 30-year mortgages, and why they are paying more than the monthly minimum payment.
Paying your house off faster saves time and money, and allows you to build wealth by investing money that would otherwise go to paying interest!
Author Jeff Hammerberg is the Founding CEO of www.GayRealEstate.com. Free Instant Access to the Nation’s Top Gay, Lesbian and Gay Friendly Realtors Coast to Coast. FREE Buyers Representation ~ Free Relocation Kit to any City, USA ~ Free Sellers Market Analysis for home sellers.