For most of the last century, the standard for housing mortgages was fifteen and thirty year loans. Today there are twenty and even forty year mortgages in the market, but the thirty year mortgage is by far the most popular. The second choice is the fifteen year mortgage, for those who are willing to sacrifice in order to pay a mortgage off in half the normal time.
Interviews with homeowners who have made this choice reveal a variety of reasons for choosing the fifteen year fixed mortgage. The general profile, however, is a couple with two incomes who are willing to put virtually all their extra income beyond the required monthly bills. The usual reasoning is that they have chosen to get through the home acquisition process as quickly as possible, so that fifteen years hence they will be able to do other things. Young couples see the time fifteen years off that they will be putting kids through college. Some career couples want to retire early and see a fifteen year fixed mortgage as a sound investment.
In all cases, taking on a fifteen year mortgage is going to require a good deal of discipline combined with an uninterrupted cash flow. The difference between a fifteen and a thirty year fixed mortgage is not, however, as great as one might think. It certainly isn’t twice the payment, as simple arithmetic might dictate. The additional comparative cost depends on the loan you get and the tax bracket that you are in.
A fifteen year fixed mortgage will usually carry an interest rate that is .35 to .40 of one percent lower than a thirty year fixed rate loan. Doing the math on a model comparison for a $300,000 mortgage shows a payment at 7% interest for thirty years would be $1995.91. The payment on the same mortgage for fifteen years at 6.65% interest would be $2638.12. The mortgage payment for the fifteen year loan is 32% higher than the payment on the thirty year loan – a loan that takes twice as long to pay off.
To be sure, getting into a loan like this isn’t easy. You have to have good credit and a household income that is healthy enough to pass the test for total monthly debt. That will probably mean that your other monthly obligations need to be minimal. Unless someone in the household buys the right lotto ticket, you probably won’t be driving expensive cars for a while.
People who choose the wider perspective are perhaps more willing to make the sacrifice. The difference in interest between the two loans characterized above is a little over $243,000. That’s an enormous savings, accomplished by fifteen years of frugal living. It’s a difficult, but rewarding choice to consider.…Read More