Most of us brainstorm on different types of mortgage loans available in the market before purchasing a new home or before refinance. Let's say you decided to go with fixed mortgage just because you like the fact that the interest rate stays same for the duration of the loan. Would you pick a 15 year fixed over a 30 year fixed or vice-versa? We all know that interest rate on a 15 year fixed mortgage is always slightly lower than the interest rate on a 30 year fixed mortgage and with a 15 year fixed mortgage you will pay significantly less interest over the life of the loan. But is that enough information to make a decision? First, let's get an idea of what a 15 year fixed mortgage and a 30 year fixed mortgage would cost you.
For example, consider a mortgage of $300,000.00 with an interest rate of 3.0% on a 15 year fixed mortgage and 3.75% on a 30 year fixed mortgage. I will try to put the comparison in a table format below.
For example, consider a mortgage of $300,000.00 with an interest rate of 3.0% on a 15 year fixed mortgage and 3.75% on a 30 year fixed mortgage. I will try to put the comparison in a table format below.
Based on the calculations in the above table, 30 year fixed mortgage would cost you $682.00 less every month for first 180 months and $1389.00 more every month for next 180 months (remember 15 year loan will be paid off in 180 months). However, the total interest for the 30 year mortgage would be $127,251.00 more than that of the 15 year fixed mortgage. It clearly shows that 30 year fixed mortgage will give you more flexibility with your monthly finances where as 15 year fixed mortgage will save you a lot on interest.
Still not sure what to pick? How about taking a 30 year fixed mortgage and making monthly payments which are equivalent to a 15 year fixed mortgage? Let's apply this to our example above and see how the numbers change.
Still not sure what to pick? How about taking a 30 year fixed mortgage and making monthly payments which are equivalent to a 15 year fixed mortgage? Let's apply this to our example above and see how the numbers change.
By making a monthly payment equivalent to a 15 year fixed mortgage monthly payment to your 30 year fixed mortgage you will end up paying $27K more towards interest than that of a 15 year fixed mortgage and over $100K less towards interest than that of a 30 year fixed mortgage. Plus your loan will be paid off in 16 years while still enjoying the flexibility of going back to lower monthly payments when you are in money crisis. This options suits best if you have the discipline to do additional monthly payments.
In short, if you prefer to keep mortgage payments low every month then 30 year fixed mortgage is the right choice but if you prefer to pay less interest over the period of the loan, only if you are sure you can afford the higher monthly payments, then your choice should be 15 year fixed mortgage. If you are sure you can afford higher monthly payments initially but not sure in the long run then use the hybrid option - opt for a 30 year fixed mortgage but keep your monthly payments equal to that of a 15 year fixed mortgage monthly payment.
Disclosure: The numbers and calculations in the example are approximate values and they can be validated using any online mortgage calculators and amortization calculators.
In short, if you prefer to keep mortgage payments low every month then 30 year fixed mortgage is the right choice but if you prefer to pay less interest over the period of the loan, only if you are sure you can afford the higher monthly payments, then your choice should be 15 year fixed mortgage. If you are sure you can afford higher monthly payments initially but not sure in the long run then use the hybrid option - opt for a 30 year fixed mortgage but keep your monthly payments equal to that of a 15 year fixed mortgage monthly payment.
Disclosure: The numbers and calculations in the example are approximate values and they can be validated using any online mortgage calculators and amortization calculators.
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