While a 30-year mortgage may appear to make sense to a lot of people on the surface, in reality it is often not the best option.
If you are buying a house, you will most likely need a mortgage loan to pay for a large percentage of the purchase. One of the main decisions to make when getting such a loan is deciding the preferable mortgage rates repayment time length.Best Mortgage Rates
If you get a 30-year mortgage, you will have lower monthly payments, but you will be paying a lot more interest than if you took a loan period of say 15 years.
The total interest you pay over the course of your mortgage will depend on the interest rate of the mortgage loan. The following example will showcase just how much interest you will be paying over the course of a 30-year mortgage loan compared to when you calculate a mortgage loan over 15 years.
A startling difference
This example looks to calculate a mortgage loan of 30 years with mortgage rates at a fixed 5% interest on a house that is worth $300,000. You pay 20% of the total price in cash right off the bat.
Therefore, you will need a mortgage loan of $240,000 to fund the purchase. Not including any insurance or property taxes to calculate mortgage rates, you will have to pay $1,288 each month.
You will normally get lower mortgage rates if you are looking at a much shorter time period. Assuming this is 4.5% for a 15-year mortgage loan, your monthly repayment will be $1,836. This represents an additional $548 each month.
While this may not seem like it is a massive difference, over the course of 30 years, you will have to pay a total of $463,680 for your $240,000 house mortgage loan. This compares to $330,480 for a 15-year mortgage loan. Therefore, you will be paying an extra $133,200 if you go for the 30-year option.
Other advantages to shorter terms
As well as having to pay significantly less interest on your mortgage loan when you go for a 15-year option rather than 30 years, there are a few other advantages associated with shorter terms.
You will be building up the equity in your home at a much faster rate, as more of your money will be going towards paying off the principal borrowing each month and not going into the bank’s pocket in the form of interest.
Paying off your house mortgage is also a very liberating experience as you no longer have to meet any payments and you completely own your house outright. People who have a lot of debt, whether it is student loans, credit card debt or a mortgage loan will know that the outstanding sum can be a weight on your shoulders.
If you successfully manage to pay off your house after 15 years compared to a 30-year term, you will be saving yourself from having the constant stress of continuing to have to make monthly repayments for another 15 years. You will also have a lot more extra money on a monthly basis to allocate to other areas of your finances.
Don’t get shortsighted
When it comes to finances or life in gener