Let me answer this question with another question: Would you like to pay more money or less money to buy a house? Most people would like to pay less money. And that’s why a 15-year mortgage is usually a better choice.
There are two factors that make a 15-year mortgage cheaper than a 30-year mortgage. First, interest rates on 15-year mortgages tend to be lower than rates on 30-year mortgages. As I write this on May 10, 2011, bankrate.com reports that the average rate on 15-year fixed-rate mortgage is 3.83%, while the average rate on a 30-year fixed-rate mortgage is 4.59%. That’s a difference of 0.76%. On a $200,000 mortgage, this saves you $31,953.70 over the life of the loan.
But the bigger savings is due to the fact that you have to pay interest for only 15 years instead of 30 years. Because you the money back faster, this further reduces the amount of interest you pay over the life of the loan. This faster payback saves you another $73,488.90 in interest over the life of the loan.
Add these two savings together and you end up saving a total of $105,442.60 with a 15-year mortgage. Over the course of a 15-year mortgage at 3.83%, you will pay a total of $63,231.19 in interest, while you will pay $136,720.10 over the life of a 30-year mortgage at 4.59%.
But there is one trade-off. Because you will pay off your mortgage in half the time, your monthly payment on a 15-year mortgage will always be higher than your monthly payment on a 30-year mortgage. The monthly payment on 15-year mortgage at 3.83% is $1,462.40, while the monthly payment on a 30-year mortgage at 4.59% is $935.33. This is a difference of $527.06.
The paradox is that the 30-year mortgage makes a home more “affordable” because it reduces your monthly payment, but at the same time it makes the home more expensive because the increased interest charges that you will pay over a 30-year period.
