Is A 15-Yr Mortgage the Best Way to Save Thousands?by Tim Manni
Eager to rid themselves of debt as quickly as possible, many borrowers are turning to 15-year mortgage loans over the more conservative 30-year fixed loan. With interest rates some 30 points lower than 30-year loans, and the prospect of paying off your debt in half the time, more and more borrowers are convinced that a 15-year loan is the best way to save thousands.
It’s true — in comparison to a 30-year loan, paying off your mortgage in 15 years will save you thousands in interest payments:
Those borrowing $400,000 on a 15-year loan, with a 4.375 percent interest rate, the average rate earlier this month, can expect to pay about $3,034 a month, compared with about $2,056 a month for a 30-year fixed-rate loan with a 4.625 percent average rate.
Because a 15-year loan also has 180 fewer interest payments than a 30-year loan, the borrower with that 15-year loan would pay $194,000 less in interest over the life of the mortgage.
Taking that into consideration, the experts still say there are even smarter strategies that will help you save. One of those strategies is as easy as paying a little extra each month. While bi-weekly payments are one way to cut out thousands in interest payments, some lenders either don’t allow them or impose hefty fees to use them.
Here’s a way to do the same for free: by dividing your monthly payment by 12, then adding that amount to your monthly payment, you’ve not only cut out a chunk of interest, you’ve made the equivalent of one extra mortgage payment each year.
The fact that borrowers can pay off their 30-year loan in 15 years (just by making extra payments) is just one of the reasons many lenders advise their clients to choose the more flexible 30-year term. The extra money that 15-year borrowers must dedicate to their monthly payment might be better allocated to a savings account to fund future expenses like your child’s college, a large home repair, or guard against the volatility of the current job market.
While the 15-year mortgage is designed to eliminate debt faster, the experts say it’s smarter to give yourself more options and choose a 30-year term. If you can make extra payments while still contributing to a savings account, you’ve killed two birds with one stone, and you’re way ahead of the game.
Click here to learn more about reducing interest through bi-weekly mortgage payments.