If you can swing a higher monthly payment, the 15 year mortgage is worth considering. Not only are interest rates lower for this program; you'll pay less because you're borrowing for half the time.
Think of your mortgage as part of your savings and investment plan. The way you choose to borrow impacts your future net worth, and a 15 year mortgage can be a great investment.Click to see today's rates (Apr 29th, 2017)
As of this writing, the average rate for a 30 year home loan is 4.16 percent. That's according to Freddie Mac's Primary Mortgage Market Survey®. The average rate for a 15 year mortgage is 3.37 percent.
Here is a comparison between a 15 year loan and a 30 year loan at today's average rates.
With a 15 year home loan, you pay $143,022 less interest. Your payment for 15 years is $665 a month higher than the 30 year payment.
If you're a young family, it can be hard to cover your bills and do everything you want to do. In addition, you must look to the future -- perhaps college costs for your children.
How much easier would those college years be if you've paid off your mortgage?
Middle-aged homebuyers should be thinking about retirement planning. According to Money magazine, one in three Americans have no retirement savings, and another 23 percent have less than $10,000.
Retirement will be a lot easier without the burden of a mortgage. If you buy a house at 50 with a 15-year loan, you'd be free and clear by the time you hit 65.
Click to see today's rates (Apr 29th, 2017)
The argument in favor of the 30-year loan is that you can make higher payments when you have the extra money, but you have the safety of the lower payment when you need it.
Or you can choose to put the extra money into an investment with a higher rate of return. For example, the S&P 500 has historically returned about seven percent.
Those are good arguments.
If you took the 30 year option and put the extra $665 a month (the difference between the 15 and 30 year payment) into stocks returning seven percent, in 15 years, you'll have $210,780. Your mortgage balance will be $195,264. Pay it off and you'll have an extra $15,516, before taxes.
Throwing income tax into the mix changes things up a bit. If you itemize your deductions and are in the 25 percent bracket, your interest expense is effectively reduced by one-fourth.
On the other hand, taxes reduce the gains from your stock investments by an equal percentage.
In the above example, when you reduce the cost of mortgage interest by 25 percent, and tax the investment gains at 25 percent, you actually lose $13,757 by choosing the 30-year loan. After 15 years of investing, you'd have saved $181,507, but your remaining mortgage balance would be $195,264.
The effectiveness of your investment strategy depends a great deal how your gains are taxed. The spread between 15 year and 30 year home loans is also a factor, and it matters a great deal if you deduct your mortgage interest or take the IRS Standard deduction at tax time.
If everything goes well, you can come out ahead with a 30 year loan by investing the difference in the two payments. However, life has a way of interfering with savings plans.
That's why it's so hard for Americans to accumulate enough for retirement.
Paying down a mortgage is a reliable way to accumulate wealth, according to Harvard University's Joint Center for Housing Studies.
Accelerating your mortgage repayment with a 15 year mortgage can be safer than taking your chances in the stock market. While stock returns are higher than today's mortgage rates, so are the risks.
The results of your investment and mortgage choices can have long-ranging effects, and a plan that works for a 30-year-old may not be right for a 50-year-old.
It's smart to check with a finance professional before committing to a mortgage or any financial venture. You may find that the 15 year home loan is your best investment at your stage in life.
The value of the 15 year mortgage depends partly on the difference between interest rates for 15 and 30 year home loans. The spread between 15 and 30 year rates has averaged about .50 percent since Freddie Mac began tracking it. Currently, it's higher than this -- Freddie Mac's most recent survey shows a spread of .79 percent.Click to see today's rates (Apr 29th, 2017)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
Judy T. Business Owner
I read The Mortgage Reports every day.
Sandi C. Customer Service Representative
The Mortgage Reports has been extremely helpful in educating me about mortgages, and what is available. Thank you for all that you do!
Mohammed Y. Retired
The Mortgage Reports is informative and I read it daily. I am grateful for the knowledge I have gained.
2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)