Buying a home is one of the biggest financial decisions many of us will make in our lives. Although prices vary across the country, mortgages are pretty standard throughout.
There are a handful of different mortgage options one can choose from to finance a house purchase. The most common is a 30 year mortgage. The second most popular one is a 15 year mortgage. Although the rates for a 30 and 15 year mortgage might not seem like much of a difference, the amount of interest you pay over the life of the loan varies greatly.
The lower interest rate. I recently purchased a home and got a 15 year mortgage at 3.625%. That is about half a point (.5%) lower than what a 30 year mortgage rate would have been.
Many people tend to focus on what their monthly payment will be, but simple math tells you that a lower interest rate means you are spending more of your monthly payment on equity and less on interest to the bank.
Build equity faster. For me, thirty years seems like an eternity; however, 15 years doesn’t seem that bad. By paying a little extra money towards a payment each month, you can often times reduce that 15 year mortgage to 12 or 13 years.
I plan to pay off my 15 year mortgage faster by rounding up the amount on my monthly mortgage payment. For example, if my mortgage payment was $1236 per month, I would pay $1300 per month. The additional $64 dollars goes straight to the principal of the mortgage, thus you will build your equity faster and pay off the loan quicker.
To build my net worth faster. Most people go with a 30 year mortgage because it is more common and is often the only option that is pitched to them. When I bought my first house, I didn’t even think about a 15 year mortgage.
We already discussed that a 15 year mortgage allows you to build equity faster and more equity means a higher net worth. I’m sure this won’t be the last house I ever purchase, but I can assure you that I have no plans of choosing a 30 year mortgage on my next home purchase.
If you are unsure if you are able to afford a house payment with a 15 year mortgage, then create your own free budget here at budgetandinvest.com
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