15 Years vs. 30 Years

Mortgages: 15 Years vs. 30 Years

So who chose the magic number of 30 years as the norm for mortgages? I bet it was a banker, or anyone who stands to make money as a result. If you have a mortgage, are you aware of the amount of interest you will pay over the life of your loan? This is good information and will give you the necessary motivation needed to get geared up to pay off your house early.


So what are some of the benefits of having a 15-Year Mortgage?

1. You pay less interest over the life of the loan vs. a 30-year mortgage. For example, if you had a $200,000 mortgage with a 6% interest rate, the interest paid on a 15-year loan would be $103,788, while it would be $231,676 on a 30-year loan. (With the $127,000 you are saving, you can always buy that candy apple red Mercedes Benz CL550 4Matic AWD car you’ve always wanted )! And since a 15-year loan would typically have a lower interest rate, the difference would be even greater.

2. You would have a better chance (depending on your age) of having your home paid off before you retire. That means one less bill to pay with your Social Security check (if there is still money available when you retire!)

3. You will build up equity (the difference between the fair market value and unpaid mortgage balance on a home) quicker since more of your payment is being applied to your principal balance.

Some of the things you need to keep in mind when choosing between a 30-Year and 15-Year mortgage:

1. Make sure that you can comfortably afford your mortgage payments. In our $200,000 example above, the monthly payment for a 30-year mortgage would be $1,199 as compared to a payment of $1,688 on a 15-year mortgage. That’s a difference of almost $500. As a general rule of thumb, your payments should be no more than 25% of your take-home pay, and as always it should be a fixed rate (ARMs are bad, but that’s a discussion for another day).

2. In any sound financial plan, you will want to make sure that you have an adequate emergency fund equaling 3 to 6 months of expenses. This puts a little cushion between you and “the edge” so that you will be prepared for any major financial emergencies such as a loss of work.

3. Save for retirement as a part of your overall financial plan. A paid-for home does you no good if you do not have money to eat once you retire. This is what happens to some seniors who have resorted to the dreaded “Reverse Mortgage” as a means to make ends meet by utilizing the equity in their home.

Don’t these mortgage terms sound more like prison sentences – 15 to 30 years? There is an element of truth in this statement since “. . . the borrower is servant to the lender” (Proverbs 22:7).

So what are our options? Get on a plan. Leave beneath your means. Eliminate all debt and build up an emergency fund before purchasing a home. Put at least 20% down on your home to avoid paying PMI (Private Mortgage Insurance). Save for retirement. Save for your children’s college education. Then get about the business of paying your house off early!

If you would like to calculate the total cost of your home, you can visit:

www.mortgagecalculator.org.



Peace & Blessings
Sharon


I will have more for you on Monday, March 22nd! Until keep working your plan for financial peace and freedom.


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