March 1st, 2016 6:47 AM by Jackie A. Graves
Should you switch to a 15-year
mortgage? If paying off your house is a priority, you've obviously considered
it. "One of the biggest benefits of a 15-year mortgage term is the ability
to quickly pay off your home loan," said Money Crashers. "This
option is perfect if you plan to stay put and don't want to pay your mortgage
for a lengthy period of time."
But even if you're not planning to live in your home forever, a
15-year mortgage can be a great way to go because of the money saved. And we're
not talking about pennies. We're talking hundreds of thousands of dollars.
"The 30-year fixed mortgage is practically an American archetype, the apple
pie of financial instruments. It is the path that generations of Americans have
taken to first-time home ownership. According to the Mortgage Bankers
Association, 86% of people applying for purchase mortgages in February 2015
opted for 30-year loans," said Investopedia. "But
many of those buyers might have been better served if they had opted instead
for a 15-year fixed-rate mortgage, the 30-year's younger, and less popular,
sibling. A shorter-term loan means a higher monthly payment, which makes the
15-year mortgage seem less affordable. But, in fact, the shorter term actually
makes the loan cheaper on several fronts."
The savings is substantial:
"Imagine a $300,000 loan, available at 4% for 30 years or
at 3.25% for 15 years," they said. "The combined effect of the faster
amortization and the lower interest rate means that borrowing the money for
just 15 years would cost $79,441, compared to $215,609 over 30 years, or nearly
Aceltis Financial Group
According to The Mortgage Reports,
going with a 15-year mortgage translates to a reduction in "the amount of
mortgage interest paid over the loan's life by $44,000 per $100,000 borrowed as
compared to a 30-year loan. For loans at the conforming loan limit of $417,000,
then, a homeowner would save $183,000 by using a 15-year mortgage to finance
the home instead of using a 30-year one."
That's a lot of money. But it's that higher monthly payment that
is often the sticking point for many borrowers. The monthly payment on a
15-year loan will cost more than one that's double in length for obvious
reasons—you're paying off more money in less time. But the two loan terms do
not offer an apples-to-apples comparison because the interest rates for 15-year
mortgages tend to be lower.
"15-year-loans are less risky for banks than 30-year loans,
and because the money banks use to make shorter-term loans costs them less than
the money they use to make longer-term loans, consumers pay a lower interest
rate on a 15-year-mortgage -- anywhere from a quarter of a percent to a full
percent (or point) less," said Investopedia. "And
the government-supported agencies that finance most mortgages impose additional
fees, called loan level price adjustments, which make 30-year mortgages more
The monthly payment on the 30-yer mortgage referenced above is
$1,432. On the 15-year loan, it comes out to $2,108. That steep increase is
often a deterrent for borrowers - especially those who are more concerned with
their current monthly input and output than potential long-term savings.
Doing it on your own
Of course, a 15-year mortgage isn't the only way to pay your
house off sooner. Making additional principal payments can eat away at your
balance without tying you to a higher monthly payment. Even one extra payment
per year can make a big difference.
"Making an extra mortgage payment each year (totaling 13
payments in a 12-month period) could reduce a 30-year mortgage loan to
approximately 22 years," said Nationwide.
"The most budget-friendly way to do this is to pay 1/12
extra each month. For example, by paying $975 each month on a $900 mortgage
payment, you'll have paid the equivalent of an extra payment by the end of the
Overpaying also offers a shorter path to an equity position, so
when you are ready to sell, you have more equity in your home and are in a
greater buying position. And if you do get into a situation where you need cash
you can always pull the equity out of your home.
Written by Jaymi Naciri – To view
the original article click here