Home Buying in Charlotte>Question Details

Martin, Home Buyer in 28214

15/yr or 30/yr fixed mortgage?

Asked by Martin, 28214 Sun May 4, 2008

I'm trying to figure out which would be better if I wanted to pay more toward the principal over time? With a 15/yr fixed mortgage, won't most of my payments go toward interest then slowly taper off moreso than with a 30/yr fixed mortgage? Just trying to see which one gives me the most for my money. With the 15/yr, I won't be paying too much (if any) extra (and still max out my ROTH & 401k). But with the 30/yr, I'll be able to pay more toward principal (and retirement also).

I'm looking at a $200K mortgage. Thanks!

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One of the principal advantages in home ownership is that it is a leveraged investment, and the tax benefits accrue only against the cost of capital. Before making this decision, I suggest that you take the question up with your accountant and/or an investment counselor. Your financial goals, the time-frame in which you want to attain them and other factors should be considered in your decision making process. There may be other options out there with more benefit to you than building equity in your home out of your pocket.
1 vote Thank Flag Link Fri May 9, 2008
The fastest way to pay off your home with the same payment as a 15 year loan is to get the 30 year fixed. pay yourself the difference each month and enjoy the earnings of this new account along with the higher tax deductions of a 30 year loan. In a shorter period of time, you will be able to write one check and eliminate your mortgage. Until then, enjoy the tax savings, extra earnings that you normally give the bank, and the safety of being able to access your cash, should an emergency arise.

Appalachian State University(1998), the Journal of Financial Planning(1998, 2003), the Federal Reserve(2006), and Consumer Reports(2008) all have studied this question and agree that the 30 year mortgage is best. Contact me at my website below, and I will send you a free white paper that gives 10 reasons to carry a big long mortgage in order to succeed financially.
1 vote Thank Flag Link Fri May 9, 2008
Set it up for 30 years, but double up your payments of principal pay down. You will be amazed at the difference, and you'll have it PAID in 15years or less. That gives you the comfort of a smaller payment, if circumstances keep you from paying down the principal early. Be sure you make a separate check out to your lender and clearly mark it for principal reduction only!
1 vote Thank Flag Link Sun May 4, 2008
I don't know that I can add much to advise that you have already received. The advantage, as I see it, it that the origianl interest rate on a 15 year is usually less. Sometimes only slightly and sometimes considerably. Your mortgage broker can tell you what mortgages are available at this time. This does give you a higher monthly payment.
Example: $200,000 with a 6% interest rate for 30 year fixed mortgage is a payment of approximately $1199 per month. (These are ball park figures) The $200,000 with a 6% interest rate for 15 year fixed mortgage is a payment of approximately $1688 per month. (Both of these figures are Pinicple and interest only without escrow included.) Your interest rate on the 15 year would have to be around 1% to get the monthly payment down to the $1199 per month rate. That is not likely to ever happen.

On the 30 year at 6% the interest paid the first month would be $1000 while the principle would drop $199. The amount of interest would drop about $1 for the first 3 months and then the drop would start going up by a cent or 2 each month until the interest would be $987.72 for the 13th month. Rememeber that the principle goes up the same amount that the interest drops.

The 15 year at 6% will again start out with a $1000 interest and $687.71 to priciple, but the 2nd month the interest would drop to $996.56 while the priciple would go up to $691.15. By the 13th month the interest would have dropped to $957.58

Now if you paid the approximately $488 different (between the 30 payment and the 15 year payment) to the principle of the 30 year mortgage each month, you would accomplish amost the same thing. By month 13 the interest would have dropped to $957.63.

Let's make this simpler. You will will email me at Sara@RichProperties.net, I'll email you an Excel spreadsheet that you can play with to try out different ideas. It is not a fool proof spreadsheet but it is fairly accurate and will give you an idea of what happens when you pay extra to the principle on different loans.

Let me know how I can help.
0 votes Thank Flag Link Mon May 5, 2008
You need to weigh your options. With a longer term you can pay extra toward the principal and not be tied into a larger payment. But, you will not get the larger interest deduction. So decide how you want to proceed. If you had a 30 yr mortgage and paid it off in 15 years then you would pay less interest then if you had a 15 year mortgage and paid it off on time. I would prefer your later option of 30 yr mortgage pay extra on the principal and then as you stated more toward retirement. But, I am also not a financial advisor that is just my opinion.
0 votes Thank Flag Link Sun May 4, 2008
To answer your original question, the 15 yr mtg is the better option to pay down your principal quicker. You can also make additional principal payments if you would like to pay it down even quicker with the 15 year as well. I do agree with Joe when he said it sometimes benefits to set up a 30 year and make the extra payment every month, when you have it, just in case you run into hard times. But that is only if you are disciplined enough to do that every month.

The only benefit you will get for setting up a 15 year vs. a 30 yr is you will have about a 1/4 percent less of an interest rate on your mortgage. The reason a 15 year mortgage has a higher payment vs a 30 year mortgage is that all the extra is going to directly principal and that is why it pays off in 15 years instead of 30 years. Hope this helps.
0 votes Thank Flag Link Sun May 4, 2008
I did a 20 year mortgage on one of my properties and had it paid off in 11 years. I had principal and interest payments set up to come directly out of my checking account. I could change the amount at anytime and this worked out great.

Good luck!
0 votes Thank Flag Link Sun May 4, 2008
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