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Reducing Your Mortgage Expense: 15 vs. 30 Year Fixed Rate Mortgages

Are you aware that the largest part of your mortgage expense is the interest that you pay? Amortized over 30 years, our mortgage rate calculator shows that the principal and interest (P & I) payment on a $415,000 mortgage at 5.875% interest is $2,455 per month, and over 30 years the borrower will pay $468,674 in interest--that's more than the amount of the loan! If you would like to reduce the amount of interest you pay, consider getting a 15 year mortgage instead a 30 year loan.

What are the Pros and Cons of a 15 Year Mortgage?

There is more than one benefit with a 15 year mortgage. One great advantage is that the mortgage interest rate on a 15 year mortgage is lower than a 30 year mortgage interest rate--often by .5 point or more. The other benefit is that the mortgage loan is paid off in 15 years rather than 30 years--allowing you to pay a lot less interest than if you amortized the mortgage loan payment over 30 years. However, because of the shorter loan amortization period, your monthly payment will be higher than if you pay the loan over 30 years.

Let's Compare a 15 Year Mortgage vs. the 30 Year Mortgage

Let's change the 30 year loan above to a 15 year mortgage. The same loan amount of $415,000 @ 4.95% (the shorter amortization period allows you to get a lower interest rate) for 15 years gives us: $415,000 @ 4.95% interest for 15 years = $3,271 per month. The interest paid on our 15 year mortgage drops to $173,779. That's $294,895 less interest paid!

Opting for a 15 year mortgage instead of a 30 year mortgage:

        
  • Decreases our mortgage interest rate from 5.875% to 4.95% a savings of .925%.
  •     
  • Increases our monthly mortgage expense by $816 per month.
  •     
  • Lowers our total mortgage payoff by 294,895.


Selecting a 15 year mortgage instead of a 30 year loan saves money. However, there are some definite short and long term considerations when choosing either of them. Use a mortgage calculator, or call a reputable loan officer, to discover which loan amortization period works best for you.


Posted By :
Sheryl Landrum is a Loan Officer in San Diego, California and a freelance writer specializing in mortgage issues.


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