Many homeowners with a 30-year mortgage don’t realize how much they are paying in interest. The problem is most lenders are not excited to disclose the amount either. So how do you find out what the total cost of a your mortgage will be? You can use something called an amortization calculator – we have provided one right here.
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Principal & Interest $1421
Monthly Taxes $1421
Monthly HOA $1421
Monthly Insurance $1421
Alright, paying almost double the listing price of your home isn’t exciting – so what is the solution? The solution for many is to accelerate the payment, either by paying more principal each month or by entering into a shorter loan type. The best-known among these is the 15-year term.
An example: If your mortgage balance starts out at $100,000 and your loan is written at 5% interest, the 30-year term requires a monthly payment of $536.82. Over a 30 year long mortgage you will pay $93,255.78 just in interest – yikes!
Here is some more bad news. It takes more than 20 years to pay off half of the original mortgage amount. The other half is paid over the last 10 years. In fact, a 30-year term amortizes so slowly that after five years (60 payments), you still owe almost 92% of the original balance. When you consider that the average first-time buyer keeps that home less than five years, this further makes the case that a 30-year mortgage is too expensive.
Why does anyone get a 30 year mortgage?
Plain and simple, most people need the lower monthly payment. So if you are going to get a 30 year mortgage you really need to make sure you are getting the best interest rate.
Now lets think about that same home loan, but with a 15 year mortgage. That $100,000 mortgage at 5% repaid over 15 years costs $790.79 per month, which is $253.97 more than the 30-year term. So, you have to be able to make that higher payment. For many, though, the comparison between house payments and rent makes this higher payment easier to bear.
The Advantages of a 15-Year Mortgage
Over 15 years, the total of your payments on a $100,000 mortgage comes out to $142,344 – or about $50,900 lower than the cost of a 30-year mortgage. And the acceleration is much better as well. After five years, you will have paid off about 25% of the loan, compared to only about 8% with the 30-year term.
If you cannot afford to go as low as 15 years, you can enter a 30-year mortgage and add extra payments based on what you can afford. For example, adding $48 per month to the 30-year payment reduces your repayment term five years.