Posted on: 06th Oct, 2007 12:54 pm
Why would I get a 30 year mortgage instead of a 15 year?
Starting out with a 15 year mortgage is going to save you money. You could also pay extra on a 15 year loan. But a 30 year loan gives you greater flexibility in payment options. And the really cool part is it only costs you 8 extra payments for this flexibility.
Lets look at this example...
A loan amount of $100,000.
30 year fixe rate @ 7.25%
360 payments of $682.18
A loan amount of $100,000.
30 year fixe rate @ 7% (note: you get a slightly lower rate for 15 year loans)
180 payments of $893.83
Now this is how my idea works. If you take the difference in these 2 payments which is $211.65 and apply it with the regular 30 year payment then you will pay off the 30 year loan in 188 payments. So at the same payment as the 15 year loan you can pay off a 30 year loan in 15.66 years.
Now you might ask why would I want to make those extra payment? Well you get flexibility to use your extra how you want to. If you need it at any time it is available to you. With a 15 year loan you have the same payment every month. With the 30 year you can choose to make the extra payment or not. If you need money and you skip a few early payments it will just add to the time it takes to pay the mortgage off. But what would be worse not having the money you need or adding a few months to your payoff.
Lets look at some more examples of how you could pay off your mortgage early...
All scenarios are loan amount of $100,000 and are 30 year fixed rates @ 7% We will use the an extra payment of $500 for all examples. This way you can see how effective prepaying is even if you don't have a lot of extra money to spend.
- Extra Payment Every Month
total payment = $1165.30 per month
# of payments = 120 or 10 years
- Extra Payment Every Quarter
total payment = $665.30 per month and an extra $500 every 3 months
# of payments = 209 or 17.42 years
- Extra Payment Every 6 Months
total payment = $665.30 per month and an extra $500 every 6 months
# of payments = 262 or 21.83 years
- Extra Payment Every 12 Months
total payment = $665.30 per month and an extra $500 every 12 months
# of payments = 302 or 25.17 years
So even if you only pay $500 extra per year you take off 5 years of payments.
And the extra $500 per year which is $12,500 over 25 years will save you a total of $39,918. So you net a difference of $27,418
Starting out with a 15 year mortgage is going to save you money. You could also pay extra on a 15 year loan. But a 30 year loan gives you greater flexibility in payment options. And the really cool part is it only costs you 8 extra payments for this flexibility.
Lets look at this example...
A loan amount of $100,000.
30 year fixe rate @ 7.25%
360 payments of $682.18
A loan amount of $100,000.
30 year fixe rate @ 7% (note: you get a slightly lower rate for 15 year loans)
180 payments of $893.83
Now this is how my idea works. If you take the difference in these 2 payments which is $211.65 and apply it with the regular 30 year payment then you will pay off the 30 year loan in 188 payments. So at the same payment as the 15 year loan you can pay off a 30 year loan in 15.66 years.
Now you might ask why would I want to make those extra payment? Well you get flexibility to use your extra how you want to. If you need it at any time it is available to you. With a 15 year loan you have the same payment every month. With the 30 year you can choose to make the extra payment or not. If you need money and you skip a few early payments it will just add to the time it takes to pay the mortgage off. But what would be worse not having the money you need or adding a few months to your payoff.
Lets look at some more examples of how you could pay off your mortgage early...
All scenarios are loan amount of $100,000 and are 30 year fixed rates @ 7% We will use the an extra payment of $500 for all examples. This way you can see how effective prepaying is even if you don't have a lot of extra money to spend.
- Extra Payment Every Month
total payment = $1165.30 per month
# of payments = 120 or 10 years
- Extra Payment Every Quarter
total payment = $665.30 per month and an extra $500 every 3 months
# of payments = 209 or 17.42 years
- Extra Payment Every 6 Months
total payment = $665.30 per month and an extra $500 every 6 months
# of payments = 262 or 21.83 years
- Extra Payment Every 12 Months
total payment = $665.30 per month and an extra $500 every 12 months
# of payments = 302 or 25.17 years
So even if you only pay $500 extra per year you take off 5 years of payments.
And the extra $500 per year which is $12,500 over 25 years will save you a total of $39,918. So you net a difference of $27,418
"Now you might ask why would I want to make those extra payment?"
Yes Eric i do have the question. Say, if i don't make the extra payment and invest it somewhere/ is that a bad idea?
Yes Eric i do have the question. Say, if i don't make the extra payment and invest it somewhere/ is that a bad idea?
Well Its not a bad idea at all if you can invest it for better then 7% interest return and you are planning investing it for a period of 15 years or more. Dont forget that every dollar you put back into your principle balance will be that dollar plus interest on it for the next 15 years that you dont have to pay. The way the typical ammortisation schedule is setup is to benefit the lender forcing you to pay bulk of interest first so anytime you have a chance to beat the system do it. Pay down your princible and you will stay ahead of the game. It takes dicipline but will save you alot in the end. To keep liquidity and create a safety net for yourself open a 10-20k Heloc that you can draw on for short term financial solution and in case of financial need.
"Yes Eric i do have the question. Say, if i don't make the extra payment and invest it somewhere/ is that a bad idea?"
Possibly, as long as you can yield more than you can save with a prepayment. So the long answer is yes and no, it just depends on the individual situation.
I was simply trying to show that even paying a small amount extra towards your principle can have exponential effects on the total cost of your mortgage.
Possibly, as long as you can yield more than you can save with a prepayment. So the long answer is yes and no, it just depends on the individual situation.
I was simply trying to show that even paying a small amount extra towards your principle can have exponential effects on the total cost of your mortgage.
