Paying a loan in half the time does NOT mean making double payments. In fact, many homeowners are surprised at how little they need to pay on a shorter length loan.
For decades, the 30-year mortgage was the standard when it came to financing a home purchase. But, in recent years, the 15-year, fixed-rate mortgage has become popular for a couple of reasons.
One advantage of the 15-year fixed is that a shorter term can mean lower rates. Today’s interest rates are historically low at around 3.9% to 4.5%, so they aren’t the make-or-break issue they were, say, in the 1980s when the interest rate could easily top 12%. But interest rates count.
Another advantage isn’t as easy to see. On a 30-year $100,000 loan financed at 3.9%, the payment would be a very affordable $473. On a 15-year loan, the payment rises to $736, still likely affordable.
So, why not just take the lower payment for 30 years? Because nestled within that lower payment, is a big stack of money. On that $100,000 loan over 30 years, you pay nearly $70,000 in interest. That’s real money. On the 15-year note, you pay less than half of that: about $32,000.
The question for the buyer is whether to shop around for a lower-priced property overall (in order to make the 15-year numbers work), or buy something more expensive with features that make the 30-year mortgage more attractive.
