Do You Know How Much the Bank Makes on Your Mortgage? Compare a 15 Year and a 30 Year Fixed Mortgage.
The most obvious advantage of a 15 year fixed rate mortgage over a 30 year is to own your home in half the time. But, it’s more complicated. Here are facts you need to know before you make a choice.
A 30 year amortization is the more popular loan. The interest rate is higher because repayment and risk of rising rates is doubled for the bank. But it offers a lower monthly payment and easier qualifications such as a lower Debt to Income (DTI) ratio.
A 15 year fixed comes with a lower interest rate, but a higher monthly payment. It is more difficult to qualify for, but you build equity more quickly. If you are close to retirement and have significant cash reserves, this is an obvious choice.
Significant is the difference in interest you will pay over the term of these loans. The following is a hypothetical $400,000 loan comparing both scenarios with a typical rate spread. It is not a quote for rates.
| 30 Year Fixed | 15 Year Fixed | |
| Interest Rate | 4.375% | 3.5% |
| Monthly payment | $1997 | $2859 |
You can see that the 15 year fixed monthly payment is $862 higher. But let’s look at how much you can save over the life of the loan.
| 30 Year Fixed | 15 Year Fixed | |
| Total Interest Paid | $319,000 | $115,000 |
That is a whopping $204,000 difference.
With the 30 year fixed, you pay the bank a whopping $204,000 more in interest. That’s is real money that could be put towards savings, retirement, a college fund, or anything else you can think of. Still, $862 is not always easy to come up with. Fortunately, there is a compromise solution.
It takes some planning and discipline but you can have the best of both worlds.
Solution: When you choose the 30 year loan, you have the option to pay the lower monthly payment, when necessary, and the choice to pay more, whenever you can.
Paying your 30 year note with a 15 year payment will cost slightly more than the 15 year fixed option, but substantially less, than riding it out the full 30 years. In this scenario you get flexibility and you save a lot of money in interest. You just need discipline to make the extra payment.
