If you are going to buy a home, you will inevitably encounter a very challenging question (unless you are quite wealthy): “should I get a 15 or 30 year mortgage?”.
What you decide could have lifelong consequences (after all, the term “mortgage”, by definition, is a combination of the French words “mort”, which means “death”, and “gage”, which means “pledge”).
On the surface, a 15-year mortgage rates are going to be lower than 30 year mortgage rates, which produces cost savings for the borrower. If we take a snapshot today:
- 15 year mortgage rates: 3.38%
- 30 year mortgage rates: 4.38%
Both rates are still near historical lows, but have risen noticeably in the last few months. As interest rates increase, the gap between 15 vs. 30 year mortgage rates typically widens.
If you crunch the numbers on a 15 vs. 30 year mortgage calculator, you will find something a bit surprising: the monthly mortgage payment for a 15 year mortgage is NOT twice the monthly payment for a 30-year mortgage. In fact, it’s significantly less than twice. This is due not only to lower interest rates, but also the compounding of 30 years vs. 15 years. In other words, you have the power of compounding working against you, not for you, with a 30-year mortgage.
Some things are better off shown in visual format, so I enlisted the help of my wonderful wife, who has been wanting to turn her graphic design background in to an infographic side income. A big thank you goes out to her. It’s actually the first infographic ever produced for 20somethingfinance, so I am quite excited. You can click and zoom to expand:
As you can see, the results are quite astonishing.
Now, many advocates of 30 year mortgages will say things like, “just pay it off early” or “put extra towards the principle” or “rates are so low, you should just invest the savings instead of paying off the mortgage sooner”. To do these things and have it actually pay off requires a rare combination of extreme investing discipline (habitually investing 100% of the difference), dollar cost averaging, solid market returns, and enough financial stability to not run in to hardship along the way. It could be done, but I wouldn’t trust myself to do it. Would you trust yourself?
In my opinion, the answer to the 15 vs. 30-year mortgage debate is pretty clear.
What do you think?