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We’ve all heard Dave say to never get a 30-year mortgage, but do you know why?
Some people get a 30-year mortgage, thinking they’ll pay it off in 15 years. Good intentions aside, this rarely happens. Why? Because life happens instead. You might decide to keep that extra payment and take a vacation. Or maybe it’s time to upgrade your kitchen. What about a new wardrobe? Whatever it is, there’s always a reason to spend that money somewhere else.
And it’s only human, so why give yourself the option of slacking off? It’s the same reason we recommend setting up automatic contributions to your retirement accounts. If you wait until it’s convenient, it never will be. Trust us.
When you have a 15-year mortgage from the beginning, you won’t be tempted to use that money for something else. You’ve got built-in accountability to get your house paid off fast!
What’s the Difference Between a 30-Year Mortgage and a 15-Year Mortgage?
Simply put, a 30-year mortgage will be paid off in 30 years, while a 15-year mortgage will be paid off in 15 years. No surprises there, right?
Because a 30-year mortgage has a longer term, your monthly payments will be lower and your interest rate on the loan will be higher. What does that mean for you? Over a 30-year term you’ll pay less money each month, but you’ll also make payments for twice as long and give the bank thousands more in interest.
On the other hand, a 15-year mortgage has higher monthly payments. But because the interest rate on a 15-year mortgage is lower and you’re paying off the principal faster, you’ll pay a lot less in interest over the life of the loan. Plus, you’ll be in debt for half the time.
Why a 15-Year Mortgage Is Better
A 15-year mortgage saves you time and money. And we’re not talking about saving chump change here. We’re talking about thousands and thousands of dollars.
Why should you choose a 15-year mortgage over a 30-year term? Let’s dig in.
Reason #1: You save hundreds of thousands of dollars.
Let’s check out the difference between a 30-year term and 15-year term on a $250,000 home with 20% down. That means your mortgage loan amount would be $200,000.
A 30-year mortgage on a $200,000 loan with 5% interest has a payment of $1,074 (not including property taxes and insurance). On that same house, the payment on a 15-year mortgage with a 4.5% interest rate would be $1,530. That’s a $450 difference every month.
That may not seem like much but take a look at the bigger picture. When you pay $1,074 a month for 30 years at 5% interest, you are actually paying $386,000 for your $200,000 mortgage loan. Yikes!
Now, how do those numbers work for a 15-year mortgage? A monthly payment of $1,530 for 15 years at 4.5% interest will equal $275,000. So if you go with the 15-year mortgage, you’ll save yourself over $100,000 over the life of the loan!
Reason #2: You build equity in your home faster.
Let’s look at it a different way. You’re still in that home 10 years later. The 15-year mortgage on the $200,000 loan has been paid down to about $81,000. However, the balance on a 30-year mortgage is only down to $162,000. What does this mean exactly?
It means if you have a 30-year mortgage, you’ve paid almost $130,000, but you’ve only knocked $38,000 off the loan. So over the past 10 years, you’ve given the bank over $90,000! You’ve paid the bank more than double the amount you’ve built in equity. That’s crazy!
Wouldn’t it be worth it to pay a little extra every month to avoid that?
Since you’re making bigger payments on a 15-year mortgage, you pay down the interest a lot faster, which means more of your payment goes to principal every month. That’s another win in our book.
Reason #3: You pay off your house in half the time.
Guess what? If you get a 15-year mortgage, it’ll be paid off in 15 years. Why would you choose to be in debt for 30 years if you could knock it out in only 15 years?
Just imagine what you could do with that extra money every month when your mortgage is paid off!
Keep a Long-Term Perspective
If you think you’re getting a better deal with a 30-year mortgage simply because you save a few hundred bucks each month, then you’re only thinking short term.
Go over the math again using our Mortgage Payoff Calculator. With a 30-year mortgage, you’re throwing away thousands of dollars. Don’t fall into the same trap as everyone else—refuse to go with a 30-year mortgage.
Trust us, you’ll be happy you paid the extra money each month to save yourself from years of debt. Stick with a 15-year fixed-rate mortgage so you can get your house paid off. Plus, once your house is paid off, the real fun begins! With no debt standing in your way, you can live and give like no one else.
Get the Right Mortgage
It’s simple. Don’t settle for a 30-year mortgage. You can make the right mortgage decision by choosing a 15-year fixed-rate mortgage from the beginning. It’s a smart financial decision that will bless your family for years to come.
Need help getting the right mortgage? Talk to our friends at Churchill Mortgage about getting a 15-year mortgage you can afford. They’ll help you understand your options and make a decision that helps you build wealth over the long term.
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