You may pay off your house in 15 years after all.

Today’s super low interest rates are making for much lower monthly mortgage payments, and this may have some people considering a 15-year loan instead of the traditional 30-year loan.

Which is better? One of my old business school professors said the best answer is often “it depends”. So what kind of loan you take out will depend on what you’re trying to do.

No matter if you go for 15 or 30 years, the numbers look good these days.

I went to Matt Brown, managing partner at Petaluma Home Loans, for his expertise …and the numbers.

Let’s consider a $300,000 loan:
30 years at 3.5% = $1,347.13 a month
15 years at 3.0% = $2,071.74 a month

That’s a $727 difference, which is huge. So what are the advantages of paying more? It forces you to pay off the loan faster and build equity faster. Plus, it means huge savings in interest.

Here’s the payment schedule for the same $300,000 loan.

30-year loan:
First payment March 2013
Last payment Feb 2043
Total paid $484,968.26
Total interest $184,962.26

15-year loan:
First payment March 2013
Last payment Feb 2028
Total paid $372,914.09
Total interest $72,914.09

When you pay $727 more a month for the mortgage, you’re saving $112,000 in interest over the life of the loan.

This is where “it depends” comes in. If you’re very disciplined and will keep — or won’t quit — your job, you may opt to pay the higher monthly payment but still keep the flexibility of a 30-year loan to pay LESS if you need to. It’s why we buy from stores that let us return something.  We always want options.

Matt says he often sees investment buyers going for the 30-year loan because it’s often about the cash flow – landlords want it positive every month. Conversely, he says homeowners (with a good financial situation and aren’t looking at the place as income) may consider a 15-year loan.

It even depends on how long you’ll be in the home. The average 30-year Fannie Mae loan has a life duration of just seven years. You’re paying a lot more interest in the first 10 years than later on, so it may behoove you to lock in a lower interest rate.

It’s always hard to make decisions now that will affect our lives down the road. But in either loan scenario, your best decision may be to make sure you buy while interest rates are at historic lows.


This entry was posted in Macro Trends and Analysis on by .

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About Mary Gorges

I speak from the viewpoint of the potential buyer and will write about my experience learning the basics of real estate on my way to becoming a first-time property owner. As a former journalist, I'm excited to share what I'm learning, where I go to learn it and what I'm hearing. I now work in high tech and will also share with you how to put the smartphone, Web — and even Twitter -- to use in real estate.

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