There are many decisions when buying a home. One of them is what kind of loan product to use. With interest rates, payment terms and points it can be a little overwhelming. In this article we are going to compare and contrast two popular loan products the 30 Year and the 15 Year Loan.
First let's current mortgage interest rates. 30 Year Fixed Loans are at 5.85. What does this mean as far as your mortgage payment? People frequently assume that a mortgage payment on a 15 Year Loan would be twice as much as the mortgage payment on a 30 Year Loan, but this is not the case. Using a Mortgage Calculator we can determine the payments on a 200k house.
Mortgage Payment on 200k House
30 Year Fixed Payment (5.85) $1617.23
So while the payment on a 15 Year Loan is higher it's not twice as much. The mortgage payment on a 15 Year Loan is 37 the payment would still not be twice as much.
Mortgage Payment on 200k House
30 Year Fixed Payment (5.85) $1671.54
So while the payment is a higher (by 42 more. Does this mean that you should automatically get a 15 Year mortgage? Not necessarily. There are some benefits to get a 30 Year Mortgage. Getting a 15 Year mortgage might make your payments so high that you would not be able to save as much each month. And if you ran into hard times it might be beneficial to have some money in the bank since it is more accessible to pay unexpected expenses like doctors bills. Additionally, if you take the extra money you would otherwise be putting into your mortgage and invest it in the stock market you might be able to get a better rate of return.
One question that people frequently ask is what rate of return would you need to make it worthwhile to get a 30 Year Loan over a 15 Year Loan? There are different ways to think about this question. Let's see what rate of return you would need to be able to take your money and pay off your mortgage in exactly 15 years based on current mortgage interest rates.
So you get a 30 Year Mortgage with a payment of 1179.88 instead of a 15 Year mortgage with a payment of 1671.54. So take the money you save each month by choosing a 30 year mortgage, $491.66, and put that money in the bank. If you were to receive a 30 Year Loan at 5.85 return. So if you are confident in your investments it might be a good idea to invest. If on the other hand you are simply going to put your money in a bank account it might be a good idea to consider a 15 Year Loan.
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