Buying a Home? Experts Say Take Out a 15 Year Mortgage, Not a 30 Year Loan

Did you know that if you have a typical 30 year mortgage, after 15 years, 75% of your payment is still going toward interest, and only 25% toward principal? With a typical 30 year mortgage it will not be until year 22 of your loan that more of your payment will go toward actually paying down your loan than toward interest. In fact on a $100,000 loan to buy a house, at 9% interest, at the end of 30 years you will have paid $358,971 to buy your $100,000 home, including $208,971 in interest. By comparison, with a 15 year mortgage, you would pay $241,925 to buy the $100,000 home, including $91,925 in interest--a total of $117,046 less in interest than with a 30 year mortgage. It's easy to see why many financial experts suggest home buyers take out a 15 year mortgage when buying a home, rather than the popular 30 year.

According to the article, How to figure Interest on Mortgage Loans, on the website, michaelbluejay.com, if you would buy a $100,000 loan with a 30 year mortgage and an interest rate of 9%, you might typically have a monthly payment of $805. For the first four months you would pay only $55, $55.41, $55.83, and $56.41 toward principal, however. You would be paying 93.2%, 93.1%, 93.1%, and 93.0% of your first four payments toward interest---in other words, not a lot at all toward principal. After four months you would have paid only $222 toward principal, out of total payments of $3,220.

On the other hand, with the same $100,000 loan at 9%, with a 15 year mortgage, you might pay more per month, $1,014. You would be paying a much lower percentage and dollar amount toward interest the first four months of your loan: $264, 74%; $265.98, 73.8%; $267.97, 73.6%, and $265.98, 73.4% (Naturally the percentage you would pay toward principal would be higher.) That is why the website suggests those seeking to buy a home take out 15 year mortgages, if they can afford to.

Financial expert Dave Ramsey, who helps advise people on how to get out of debt, to save, and invest wisely in his financial seminars also advises people to take out 15 year mortgages, not 30 year loans. He gives that advice to help keep "the American Dream from becoming a nightmare." He also advises people to give at least a 20% down payment--at least in part so homebuyers won't be required to buy private mortgage insurance--saving them $70 a month on mortgage payments. His other advice includes conventional loans with fixed rates. He says it is always a mistake to buy a home using a loan with variable interest rates.

On another article, 15 vs. 30-year mortgages, on the michaelbluejay.com website, even though one will pay more per month with a 15 year mortgage, if possible it is always best to take a 15 year mortgage, compared to a 30 year. The article also notes the tax advantages with a 30 year mortgage compared to a 15 year mortgage are tiny. It also notes that the even the returns for investing the difference one would save with a 30 year mortgage per month would not be great, because the returns for investing are actually less than for those investing with a 15 year mortgage.

Some people may not qualify for a 15 year rate or can't afford the payments. Ramsey says in his seminars they should wait until they can afford a 15 year mortgage, rather than take out a 30 year mortgage--even if they have to rent for awhile. That is because of all the money the will save on interest.

"You get a substantial benefit on a 15 from the lower rate. And because it's a shorter payoff period, you're paying down the balance at a much more rapid clip," says Jack Guttentag, a syndicated columnist who also runs the Mortgage Professor Web site, on the website www.bankrate.com, in an article, 15-year vs. 30-year mortgages . "But people who are on a strict budget and are focused much more heavily on the payment are going to gravitate toward the 30."

In short, many financial experts say you should take on a 15 year mortgage if you want to buy a home and avoid a 30 year loan at all costs. While some might recognize you might not be able to afford a loan without getting a 30 year mortgage, Dave Ramsey counsels you to wait until your finances will allow you to go for the 15 year loan--even if you have to rent for awhile.

Citations:
Personal attendance at Dave Ramsey Financial Seminar on CD locally
How to Figure Interest on Mortgage Loans, No author listed, Michaelbluejay.com
15 vs. 30 year mortgages, No author listed, Michaelbluejay.com
15 vs. 30 year mortgages, by Michael D. Larson, Bankrate.com