Why I Prefer a 15-Year Mortgage

My wife and I are currently saving to purchase a home in 2017. There are many factors to decide when purchasing a home: price, interest rates, location, rooms, which HGTV DIY projects, HOA fees and much more! From what I have noticed it seems that the majority of people sign up for a 30-year mortgage. I go as far to say it’s the norm in American. Funny enough a 30-year mortgage is not known in other countries, where the average mortgage can range from 5- 15 years.

 

The obvious benefit of the 30-year mortgage is a lower the payment. However, it does give a larger total payout for the loan. Still a lower payment today is more appetizing than saving money in the future. So why am I writing about this? Well just to talk about why I plan on doing a 15-year mortgage and to spread the knowledge. But first let’s take a step back and briefly see how the 30-year mortgage came about.

 

History of 30-year Mortgage

 

The idea of a mortgage came about in the 1930s and not from a bank as you may imagine. It came about by insurance companies in hope they would gain homes if the borrowers failed to make payments. Corporate America has been greedy for a long time. The government then decides in the 1950s to introduce the 30-year mortgage to help the economy. Since then banks have taken on the bulk of home mortgages and the government heavily regulates the market.

 

Why Banks Push 30-Year Mortgages?

 

Banks, like many other industries, want to make a product seem as affordable as possible and give them the max profits. Thus the 30-year mortgage is the best option by a long shot. Consumers see low payments and know at the end of the 30 years the home will be paid for. Thus consumers are now happy. Banks see low payments monthly but higher total payout over the 30 years. Banks are now happy. It’s a win-win situation.

 

This however is short term thinking and let’s face it, if you want to be wealthy you need to think long term. Let me break it down into an example. We have Bruce Banner purchasing a home and borrowing $125,000 after paying his down payment. The average fixed interest rates as of 11/02/2016 were:

 

Interest Rate

Monthly Payment

Total Payout

30 Year Mortgage

3.69%

$575.00

$206,873

15 Year Mortgage

2.96 %

$861.00

$154,948

 

Simple math shows by thinking short term Bruce Banner is missing out on saving $51,925. Bruce Banner is angry now!!!

Compound interest is no joke. Those who don’t understand compound interest will end up paying it. Those who do understand compound interest will end up earning it.

 

Pay it Off Faster

 

Another reason why I love the idea of this 15-year mortgage is that the light at the end of the tunnel, which is no mortgage, is reduced in the half the time. I’m your average millennial next door and dammit I want things fast with a pretty bow on it. Living in a home that’s paid for in 15 years will give me more financial freedom to live life and do what I enjoy as I near retirement. Speaking of retirement, a faster paid off loan will ease the burden of retirement savings. Save your nest egg at all costs.

 

Reality Check

 

For those who already are in a 30-year mortgage and want to pay it off in 15 years it is very simple. Calculate a 15-year mortgage and make the extra payments every month.

 

But be real with yourself. Like for real for real. Do you have the discipline to pay extra every month? My reality is my discipline is low and signing up the 15-year mortgage is the type of discipline I would need to stay on track. In addition, life comes up! Car breaks down, vacation deals, Christmas and well anything else that’s more important than paying extra on the mortgage. Therefore, I need to be signed up to have the mortgage company keep me in check. If you are like me then I strongly suggest you sign up for it as well. Nothing to be ashamed about, it’s just that I don’t trust myself as far as I can throw myself.

 


Here is to hoping that you learned something from this post. I would hope this planted a seed in your head to make you think if the traditional 30-year mortgage or 15-year mortgage is a good fit for you. These feelings are of course my own so don’t go thinking it is a must to refinance a mortgage. I can imagine the headaches already with the paperwork. Nonetheless it’s worth considering which mortgage is best for you as purchasing a home become a reality.

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