The 15-Year vs. 30-Year Mortgage Debate
Its so hard to have a long term perspective when working with a checkbook balance that is burdened by more goings than comings. In fact, for many home owners maintaining a budget is one of the biggest challenges one can face in the fight for financial freedom. Did you know that the very word mortgage actually means “death note” in Latin? It’s no wonder why we feel like our very life force is being sucked out of us as we sign that promissory note. On the precarious path to financial freedom, consider this nugget of advice regarding that note. We will let you be the judge of who wins in the end.
Benefits Outweigh the Risks
So, you, like most hard working Americans receive a monthly income with which you are required to pay out large portions of to various financial obligations such as housing, food, transportation, communication, clothing, recreation, the list goes on and on. Sounds simple enough right? What if your mortgage professional told you could afford twice the home your thought and you could spread the life of the loan? As self appointed “builders of the American dream” we think that bigger is most definitely better, except when it comes to the mortgage payment. Sadly, many people evaluate the monthly payment option without ever examining another, less popular option, the 15 year note. Dave Ramsey, renowned financial guru and host of The Dave Ramsey Show has some great advice on this topic. “Actually, the 30-year mortgage was always a bad idea. It simply enabled borrowers to buy more house than they could afford by spreading the payments out over a longer term. On top of that, those homeowners paid tens—even hundreds of thousands of dollars more in interest.”
Where the Rubber Meets the Road
Let’s take a look at some numbers and see why the traditional 30 year fixed rate mortgage is most definitely a bad move. Ramsey elaborates, “the difference between a 15- and 30-year mortgage with a 6% interest rate on a $225,000 home is $144,000 over the life of the loan. What could you do with $144,000? Pay for your kids’ college? Buy a car? Buy another house?” Seems simple enough right? A 30-year fixed rate mortgage seems like the logical choice when you are trying to squeeze as much life out of those hard earned dollars as possible. However, you may find that the monthly mortgage payment for a 15 year is not even close to twice what you would expect it to be being that the life of the note is chopped in half. This is never the case. In a 15-year note, the interest the banks make is far less because the maturation is chopped in half, thus getting you to the principal amount of the debt much quicker. What a sight to behold it will be when you see your monthly mortgage balance dropping so quickly that a zero balance may be something that will occur during your lifetime!
This seems all fine and dandy but if you are shaking in your shoes about committing to a larger payment, then you probably shouldn’t be buying a home with such a huge price tag. Play it safe, start small and laugh all the way to the bank as you consider how much money goes into your own coffers when it’s all said and done.
Miguel Gross is a blogger for financial sites. With lowering interest rates, find out if it’s time to buy. There are several helpful referral companies such as Turner Symons.