Refinancing Mortgage Loans – Which is Better 15 or 30 years?
While considering their options in refinancing mortgage loans, many people are asking themselves if a 15-year or a 30-year mortgage is the most excellent option. Let’s take a quick look at both options from a financial point of view and look at the clear advantages and disadvantages of both are.
An Instance of Both Loans with Their Costs
Assume for a second that you are looking at refinancing mortgage loans of $100,000. If you were to do a 15-year loan at say 5% interest, the payment on your mortgage loan would be about $800 each month. The entirety of interest paid over the 15-year time would be about $42,000. Because your mortgage interest is tax deductible, this makes your total interest paid more like $32,000 over the 15-year life of your loan.
By applying the equal math to a 30-year fixed mortgage at 5.5% interest, your monthly payment is about $575 each month, about $255 less than the 15-year mortgage, but the interest over the life of the 30-year loan would be about $46,000 after tax considerations.
Advantages and Disadvantages to Each Option
So, in the example above, if you look only at the actual costs, you will see that the 15-year mortgage is clearly the cheaper option of the two. You will be mortgage free in half the time and you will a lesser amount for your home as well. However, each month you will be paying an additional $255 per month on your mortgage and might have invested that money into your IRA or into the stock market. And, you are also stuck with the higher payment for the life of the loan regardless of what else happens in your financial life.
With the 30-year mortgage option, you can clearly see that you will have the extra $255 each month to do with as you please. Most investments, even very conservative ones, will net you a return of more than 5.5%. If you were to take that extra $255 each month and invest it, at even 6%, after the 15 years you would have more than $65,000. At this point the balance due on your mortgage isn’t much larger than that and you could easily pay it off. This would actually make the 30-year loan cheaper in the long run!
While the 30-year mortgage could be the better option it does rely on the fact that you have to have discipline and save that extra $255 each and every month. While some people have this dedication and discipline, a lot of us do not. Simply by paying the extra $255 to our mortgage would insure that we have an automatic savings plan in place and we would be mortgage free in 15 years.
In addition, investing forever involves some form of risk. What if you choose to invest your extra money each month and do not see the rate of return higher than your mortgage payment interest would have been? There are unknowns to this scenario.
While no option is right or wrong for everyone, refinancing mortgage loans for a better interest rate is always a good decision. Choosing whether or not you wish for a 15-year or a 30-year mortgage is a more personal choice.
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