The attractiveness of a lesser monthly payment may seem alluring at first, but soon the math will show a 15 year mortgage is the way to go. Several sites give advice that a home should never be above a certain percentage of your income. My personal favorite advice is to be no more than 25% of your income with taxes and insurance. This gives plenty of room in case life throws a Murphy moment our way.
Let’s take a look at a 30 year mortage example:
Home Price: $200,000
Term of the loan: 30 years
Interest Rate (varies from day to day): 4.0%
Tax Rate: 1.5% (estimate)
Your payment would be approximately $1,204.83 not including insurance costs in your local area.
This means you would have paid $334,239.01 for a home over the course of 30 years. Just the interest payment was $134,239.01!
Next let’s look at the same loan over a 15 year term:
Home Price: $200,000
Term of the loan: 15 years
Interest Rate (varies from day to day): 3.2%
Tax Rate: 1.5% (estimate)
Your payment would be approximately $1,650.48 not including insurance costs in the local area.
This means you would have paid $248,503.50 for a home over the course of 30 years. The interest payment in this example was $48,503.50.
Just by taking on a little higher payment a savings of $85,735.51 can be realized. Do you have some things this money could help with? Imagine that same money making 8-10% in growth stock mutual funds or being able to use that money towards a real estate investment (or even some family fun)!
If a 15 year mortgage is out of the budget, maybe more needs to be saved for the down payment or less of a house should be purchased. Don’t let your money walk out the door without a good reason!
