A fifteen-year mortgage is cheaper than you think

After I finished working on my new amortization calculator, I decided to test it out on different mortgage terms. I was surprised what I found: you are much more likely to be able to afford a 15-year mortgage than you think. Here is an example to illustrate the difference between 30 and 15 year terms.

A 30-year mortgage

  • Value: $150,000
  • Interest Rate: 4.5% APR
  • Total: ~$273,600

Most mortgages are set for 30 year terms, with current interest rates hovering at 4.5%. This would mean that you would have to pay about $760 a month for your house for 30 years. Overall, you’d pay about $123,600 in interest. That is almost the price of the home itself.

A 15-year mortgage

  • Value: $150,000
  • Interest Rate: 4.0% APR
  • Total: ~$199,700

A common misconception about fifteen year mortgages is that half the time means twice the payment. In fifteen year mortgages the principal is paid down faster, so the interest accumulated is lower. Now here’s where it gets even better: because fifteen year mortgages are shorter term than thirty year mortgages, the going interest rate is lower by 0.5%. This may seem like a very small difference, but in the case of the example shown, it’s a difference of about $6,800 in interest a 4.5% fifteen year loan. The new payment would be about $1,110 a month, and you’d pay about $49,700 in interest.

Breaking down the differences

The payment for the 15-year mortgage is higher, but less than 1.5 times the 30-year payment. The 30-year mortgage has almost 2.5 times the interest of the 15-year mortgage. Of course, with a 15-year loan you’d also own your house outright 15 years sooner. An important consideration, however, is that additional property taxes weren’t included in this calculation.

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