First-time buyers may want to be more cautious when it comes to 30-year home mortgages, says MarketWatch investing columnist Philip Van Doorn. If a buyer can afford it, they may save much more money by opting for a 15-year financing plan.
While paying off a home over 30 years can make the monthly payments more affordable, it's more costly in the long run. Van Doorn writes:
Many people have a terrible habit when deciding on home or car purchases of only considering the affordability of monthly payments, rather than the entire cost for the life of a loan. According to Bankrate.com, the average interest rate for a 30-year fixed mortgage loan is currently 3.66%, while the average rate for a 15-year fixed mortgage loan is 2.72%. These are extraordinarily low rates — possibly the lowest you will see in your lifetime.
Let’s begin with an example where a home is purchased for $260,000. Based on our purchase price of $260,000, the 20% down payment of $52,000, loan amount of $208,000 and interest rate of 3.70%, the monthly principal and interest (P&I) payment for the 30-year loan is $957.39. With an interest rate of 2.70%, the monthly P&I payment for the 15-year loan is $1,406.59.
The total interest paid over the life of the 30-year loan will be $136,659. Total interest paid over the life of the 15-year loan will be just $45,186. So if you can afford the 15-year loan, you will save $91,473. A shorter term means a lower interest rate, faster equity build-up, and plenty of savings on interest as you get the debt monkey off your back much sooner.