Would you like four years of college tuition payments with that mortgage, madam?
What is the difference in interest payments between a 15-year and 30-year mortgage on a $500,000 loan?
Go on, guess. $25,000? $50,000? That sounds like a lot, but it’s not even close. Total interest payments on a 30 year loan at 3 5/8 % come to over $320,000. At today’s rate of 2 7/8 %, the total on a 15 year loan would be just……$116,000. That’s a saving of $204,000 !!! Yay, Harvard for free!
I have written before about the advantages of making extra payments on a standard mortgage, but the really big savings are made when a lower interest rate is coupled with shortening the life dramatically.
In recent years the difference in rates between 15 and 30 year mortgages has been around 0.4%, while today it is 0.75%. If mortgages generally are on sale at today’s rates then 15 year loans are at fire sale prices.
Now, of course, 15 year mortgages are not for everybody and they do have some disadvantages. The main ones are higher monthly payments ($3,423 vs $2,281 on the $500,000 loan above) and a lower tax deduction ( interest is $1,198 vs $1,510 a month to start).
Many, many years ago the first credit card, Access, was introduced in the U.K. with the slogan “it takes the waiting out of wanting”. Ever since, we have been on a borrowing binge. The last five years or so have shown us that too much debt – and too easy borrowing – is not necessarily such a good idea after all.
We are now faced with the fact that student loan debt is larger than credit card debt. I know of couples who can’t buy a house because of the cost of paying off student loans. For parents who plan to pay for their children’s college education a 15 year mortgage should be considered as part of their overall financial planning.
Very interesting, Andrew. How do you compare the fixed versus the 5/1 and 7/1 ARMs that Citibank offers at 2.25 and 2.5% respectively? It seems like expensive protection for the second eight years.
I think the biggest difference here is the amortization: ARMs use a 30 year whereas I am suggesting a 15 year fixed. I don’t know how the 7/1 you quote compares with a 15 year fixed in California, but quick research here suggests not much difference in rates. With my expectation that rates will rise from here the longer I can fix at today’s rates the better to me. Low rates and a short amortization give the greatest savings.