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15-Year Mortgages Are the Wise Choice

Lower rates, quicker payoffs make 15-year loans better

April 29, 2016

By SAM GARCIA Mortgage Daily

portrait of Sam Garcia

While there is only one good reason for a prospective borrower to opt for a longer 30-year mortgage, there are several reasons to instead go with a 15-year loan.

The only reason borrowers choose to go with a long-term 30-year mortgage is to reduce the monthly payment amount in order to afford a higher-priced property.

In the days of never-ending appreciation, it might have made sense to become over-extended and leverage monthly payments to maximize the home's purchase price.

But setting the leverage factor aside, the case for choosing a 15-year loan term is overwhelming.

Many consumers will say that they can't afford a 15-year mortgage.

But in reality, it's the home that's unaffordable -- not the shorter term. This can be remedied by ignoring the social status that accompanies a more expensive property and lowering the target price.

So why would a home buyer want to go with a lower price and shorter term?

There are a number of reasons this makes sense.

First, the shorter-term loan is the better choice because of the 15 years in payments that are entirely avoided.

At the same point that a 15-year borrower is making his or her final 180th payment, the 30-year borrower is effectively just starting a new 15-year loan.

A second benefit of a shorter loan is a lower rate.

If the borrower goes with a 30-year loan, the interest rate would be 3.66 percent based on the most-recent data reported by mortgage giant Freddie Mac.

Fifteen-year rates, however, are just 2.89 percent. That's a whopping 0.77 percentage points lower than the longer-term rate.

An even bigger reason for electing to go with the shorter term is equity building.

Back in the pre-crisis days before the real estate crash, you just had to own a property to build equity.

After the crash, though, appreciation has been much harder to come by.

But with a 15-year mortgage, equity begins building immediately.

This is in deep contrast to a 30-year loan, which takes years before the loan balance begins to significantly decline.

And it's not just the borrowers who go the full term on the loan who benefit.

For instance, consider a hypothetical purchase of a $250,000 property.

Let's say the home buyer makes a 10 percent down payment. That would put the loan amount at $225,000.

On the hypothetical $225,000 loan, the 30-year payment of $1031 (excluding escrow payments for taxes, insurance and mortgage insurance) would leave the borrower with a loan balance of $202,369 after five years.

But five years into the loan, the balance for the 15-year borrower with a payment of $1,538 would be just $160,387.

That is almost $42,000 more in equity for the 15-year borrower than the 30-year borrower. And the monthly payments for the 15-year borrower during the same period were just around $30,000 more than on the 30-year loan.

At 10 years, the 30-year borrower's loan balance is $175,200, while the 15-year borrower has a balance of just $85,891.

In this case, the 15-year borrower made $60,850 more in payments during the 10 years yet had $89,309 more in equity.

And when the 15-year borrower finishes paying off the loan in 15 years, the 30-year borrower still owes $142,585.

The numbers all point to a 15-year mortgage.

Sam Garcia founded Mortgage Daily in 1998 and became its full-time publisher in 2000. Prior to his news career he worked in mortgage lending for two decades.


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