Is a 15 or 30 Year Mortgage Better?
In this post: We will consider the 15-year mortgage vs the 30-year mortgage and take a look at a recent selection from my Investopedia Advisor Insights.
This is the Millennial Wealth Blog.
15 Year or 30 Year Mortgage
So, you have decided to purchase your first home. Which mortgage should you choose?
First and foremost congratulations on your decision to be a homeowner! Unfortunately, the decision making isn’t over and it may get harder from here…
There are so many factors to consider when trying to figure out what mortgage is right for you. Let’s look at some of the things that may sway your decision one way or the other.
The current median home price in the USA is now about $245,000. This a large investment any way you look at it, and you want to feel like you are making the best possible decision when selecting a mortgage.
Let’s look at the numbers as of June 14, 2017:
Current USA average 30 yr mortgage rate is 4.02%
Current USA average 15 yr mortgage rate is 3.25%
The cost of a 30 yr mortgage at the current average rate, you’ll pay $478.57 per month in principal and interest for every $100,000 you borrow. So, if your loan is for $200,000, you will pay $957.14 in principal and interest every month.
The cost of a 15 yr mortgage according to Bankrate, “Monthly payments on a 15-year fixed mortgage at that rate will cost around $702.67 per $100,000 borrowed. That may squeeze your monthly budget more than a 30-year mortgage would, but it comes with some big advantages: You’ll come out several thousand dollars ahead over the life of the loan in total interest paid and build equity much more quickly.” For a $200,000 loan, you will pay $1405.34 in principal and interest every month.
Over the life of the loan, you will pay some serious interest. Assuming a $200,000 loan, the 30 yr mortgage at the current average rate will cost about $144,570 in total interest.
For the same loan amount on a 15 yr mortgage at the current average rate, the total amount of interest paid will be about $52,961.
As you can see, the 30 yr mortgage would cost about $91,609 more in interest alone.
But, which loan is better?
Well, it depends on your particular life circumstance. I do not have a hard and fast answer that works for every client. If you plan to buy your home and live in it forever, then the 15-year mortgage may be the best choice. If you plan to start building a real estate portfolio of rental homes, then the 30 yr mortgage may be the right choice, as your cash flow would be greatly increased while a tenant is essentially paying the mortgage for you.
There are a number of other factors to consider when making a mortgage decision such as your current budget and the change in housing costs moving forward. Don’t forget insurance, repair and maintenance costs, increase in utilities and homeowners association dues, just to name a few.
Purchasing a home may be the single biggest financial decision you will make. I would highly recommend working with a Fee-Only Financial Planner to help you determine the best direction for your personal situation. They should get to know your personal and financial situation to help you make the best decision possible.
I am a Premier Advisor on Investopedia’s Advisor Insights, where I answer questions that are submitted by readers on topics ranging from the simple to the more complex. Here, we look at one of my recent favorites:
I am approaching 30 years old and am very frugal, saving over $20K per year, even after putting 6% into my 401(k) plan. I have decided recently to sell off various investments that I made years ago when I didn’t really know what I was doing, and invest roughly $75K correctly. What proportion of my investment assets should I be trusting to a service like Betterment, and when should I start seeking in-person advice?A:
Great question! First off, you are doing a fantastic job saving for your future. To answer your question directly, 100% of your total portfolio will be managed fantastically by Betterment. In my opinion, the Betterment platform is one of the best technology-driven “robos” in the marketplace. My firm uses Betterment for investment management, as it provides low-cost portfolios with automatic rebalancing and tax loss harvesting on taxable accounts. There are a number of other reasons why I use it with my clients but I will not bore you. As far as seeking professional advice, you should hire an advisor that understands you as an individual, sooner rather than later. There are many studies that show the “Alpha” that a good financial planner can provide. Click here to read a report by American Funds that looks at the value proposition of a financial professional. I would take it a step further and tell you to find a fee-only financial planner, as they will operate as your fiduciary and avoid any kind of conflicts of interest.
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