Savings Comparison: 15-Year Fixed-rate vs. 30-Year Fixed Rate Mortgage?
While a 30-year fixed-rate mortgage is currently the most popular home loan product in the United States, another type of home loan, the 15-year fixed-rate mortgage, is growing in popularity. A 15-year FRM allows borrowers to save thousands in interest while having their home paid off significantly faster. Of course, borrowers will have to fork over more each month in payments, but that can be well worth it due to the long-term benefits of this kind of loan product.
Pros and Cons of 15-year FRMs vs. 30-year ARMs
In comparison to 30-year fixed-rate mortgages, 15-year fixed rate mortgages allow borrowers to:
Typically get lower interest rates
Pay off their mortgage in half the time
Can easily pay less than half the interest of a 30-year ARM
Despite that, 30-year mortgages do have some benefits. Due to the fact that your monthly mortgage payment will be significantly less, you’ll have more cash flow. Plus, your PITI (payment, interest, taxes, insurance) will be less. This will improve your debt-to-income ratio (DTI), meaning you’ll be able to buy a more expensive home with a 30-year fixed-rate mortgage than with a 15-year FRM.
How Much Can You Really Save with a 15-Year Fixed-Rate Mortgage?
When you crunch the numbers, you’ll find gigantic savings with a 15-year mortgage. For example, let’s say you were to buy a $240,000 home with a $40,000 down payment. You take out a 15-year FRM for $200,000, and your interest rate is 3.7%. You’d have a monthly payment of $1,449 (excluding taxes and insurance). Over its entire life, that loan would cost you $300,908, or about $61,000 in interest.
On the other hand, if you were to take out a 30-year FRM for the same house, with an interest rate of 4.4% (since 30-year rates are pretty much always higher), your monthly payment would be $1,002. Despite a much lower monthly payment, you’d pay $400,547 over the life of the loan, which is nearly $100,000 more than if you had taken out a 15-year FRM! That means you’d have paid more than $160,000 in interest just to buy a $240,000 home.
It’s clear what if you can afford it, a 15-year fixed rate mortgage is most likely the best financial choice.
What If I Already Have a 30-year FRM?
If you already have a 30-year fixed-rate mortgage and want to save more money, there are a few ways to do this. First off, you may be able to simply make larger mortgage payments each month, ensuring that your loan is paid off faster and that you won’t have to pay as much interest on it over time. Just make sure that your mortgage doesn’t have a prepayment penalty that could charge you extra for doing this.
While making extra payments on your 30-year home loan can save you serious money, you’ll still be stuck at that higher, 30-year interest rate. That’s why many people actually decide to refinance their 30-year FRM into a 15-year FRM. That way, they can pay off their loan faster and take advantage of lower interest rates.