Comparing 30-year vs 15-year Mortgage Terms
A little tour on interests payments
When it comes to shopping for a mortgage there are a lot of products available these days. Sometimes these listings feel like scrolling on a popular social media site.
However, when you look closer, you see a lot of information about each product such as the mortgage rate, loan term, fixed vs adjustable, points, fees among other things.
But, do these listings look very different from one other? or Do you pay close attention to every aspect of the product such as fee vs loan term?
Do you think you have enough information on deciding the clear winner among those listings based on your needs?
Or, answer this, what’s the most important thing you see when you look for these products. If your answer is Monthly Payment, read on, because, while Monthly Payment is the amount that as a borrower you care the most, you must also know how other factors decide your Monthly Payment.
The two most significant factors that decide your monthly payment are the Loan Term and the Rate Of Interest.
The two well-known Mortgage terms are 30-year fixed and 15-year fixed.
The 30-year term is twice as long as a 15-year term. That means, since you are borrowing for a longer term, you will most likely pay higher and more interest on your Loan Amount than a 15-year fixed loan.
The following calculations may help you realize once you see the difference in the numbers.
Interest Difference on Outstanding Loan Balance of 80,000
Interest Difference on Outstanding Loan Balance of 400,000
But, why is that? Why 30-year fixed loan costs twice (it is actually more than twice if you have noticed above) as much as a 15-year fixed mortgage?
- First, because you have borrowed someone else’s money (lender), they would want to make interest income since it is an investment for them.
- Second, when you take a 30-year loan, it costs more to the lender and also twice as risky as the 15-year fixed loan.
But keeping these reasons aside, how does the math work behind this?
The interest payment for the year is calculated (in simple terms) based on the Outstanding Loan Balance and the Rate Of Interest.
When the mortgage payments start, the outstanding balance is maximum and therefore, for the first few years the monthly payments contribute most to the interest and very little to the principal amount.
As the years pass on from your loan term, this balance starts to change, and your monthly payments contribution starts to weigh more on the principal amount.
This is one of the reasons why you would find a lot of advice on not selling your home before 5–7 years since you started your mortgage payments.
So, the next time you are shopping for mortgage products, be aware of these factors in your decision-making process and “Be Wise With Money”
The material provided on the moneybonsai blog is for informational use only and is not intended to be taken or assumed as financial or investment advice. The team at moneybonsai bears no liability for any loss or damage resulting from one’s reliance on the material provided. One should consult a financial professional to make financial or investment related decisions.
