Should I Get a 15, 20 Or 30 Year Mortgage?

This is a question that people applying for a new mortgage loan often ask their mortgage loan consultant. So let’s take a look at this question in more detail to help with your decision making.

There are a few variables to consider before you make a decision about the term of your new mortgage. Things such as, how long you plan to stay in the house, is it your primary residence or an investment property, what is your debt to income ratio, can you afford the payment, will the interest rate be different and how much money will you save.

Using your hard earned money wisely should be your first consideration. Few people can pay cash for a new home but still, paying more interest on a loan than you absolutely have too is not really in your best long term interest.

30 Year Mortgage

Let’s say that you are looking to buy a new home worth $180,000 and you are going to put down 5% ($9,000) and the interest rate will be 5.75%. Your principal and interest payment will be $997.91 amortized over 30 years.

Keep in mind that this is not your total house payment. Added to the P & I will be escrows for taxes and insurance and private mortgage insurance. So, find out your actual house payment before making a final decision.

Let’s say you stayed in the home for 30 years. Over the life of the loan you will pay your balance due on your mortgage of $171,000, plus you will pay in total interest $188, 247.59 if you do nothing but make your regular monthly payments.

If you live there five years, you will have paid $12,376.66 toward your principal balance, will still owe $158,623.34 on your mortgage and will have paid $47,497.94 in interest.

20 Year Mortgage

For the same loan amount, down payment and interest rate the principal and interest payment will be $1,200.56.

If you stayed in the home for 20 years your total interest paid over the life of the loan will be $117,135.76. You will have paid $71,111.83 less in interest and your home mortgage will be paid off in 20 years. This is over $71k that you will not have had to work hard to earn.

If you only stay in the house for five years you will have paid $26,425.09 toward your principal balance and will still owe $144,574.91 on your mortgage and will have paid $45,608.51 in interest. So, short term this is not a lot of savings to you in interest paid.

15 Year Mortgage

Ok, for the same scenario for a 15 year mortgage here are the numbers for you to consider. Your principal and interest payment would be $1420.00.

If you stayed in the home for 15 years your total interest paid over the life of the loan will be $84,600.47. You will have paid $103,647.12 less in interest than you would have for a thirty year mortgage and your home will be paid off in 15 years.

If you only stay in the house for five years you will have paid $41,637.42 toward your mortgage and will have paid $43,562.58 in interest. Even though you will not have saved that much in interest you will have a considerable amount more in equity in your home.

You will be paying $422.09 a month more in a house payment than you would for a thirty year loan. This amount times 60 months comes to $25,325.40. That added to the $12,376.66 that you would have paid during a 30 year term comes to $37,702.06. Above we stated that you would have paid $41,637.42 toward your mortgage, so why the difference. It is because more of your payment has actually gone toward the principal amount due vs. the interest amount charged. So, comparing just the difference in the interest paid is not giving you the total picture because you have actually built more equity in your home, even with staying in it just 5 years.

Another thing to consider is the interest rate. Throughout these scenarios we have used the same interest rate. Lenders may charge a different interest rate depending on the term of the loan which would change your numbers.

Other Factors

Even if you look at these numbers and decide that you can make the higher house payment, the lender may not agree with you. If the increased payment pushes your debt to income ratios out of their guidelines then you may no longer qualify for the loan.

You might also want to look at a comparison of putting this money in another long term investment. Most investments don’t pay as much interest as you will pay to borrow money. However, if you could put your money into a 401k offered by your employer where they match the funds then that might be a return that would be more positive than saving interest on your home.

People tend to spend a lot of time looking at ways to invest their money but seldom put a lot of thought into the numbers associated with the investment in their home.

Hopefully this will give you some good food for thought and help you to look at your home investment in a clear light.

The author has been publishing online for several years on a variety of subjects and interest. Come visit some of her latest sites at Check Credit Score which offers information about what’s a good credit score and why you should really check your credit scores and view your credit report on an annual basis. View Credit Report