I’ve heard a lot of talk lately about paying off your mortgage. In order to do so earlier, some people talk about taking out a 15-year mortgage instead of the more traditional 30-year mortgage. By using a 15-year mortgage your home is paid off 15 years sooner (obviously) as well as you pay less interest and usually at a lower interest rate. Sounds like a good deal right? So if you have the cash flow a 15-year mortgage is the way to go, right? Wrong. Well maybe let’s leave it at it depends for now and here’s why.
Let’s say you have a $300,000 mortgage. I looked up the rates on bankrate.com. I found that current 30-year mortgage rates are 5.16% and 15-year mortgage rates are 4.67%. Using these rates the monthly payments are $1,639.93 for the 30-year and $2,321.13 for the 15-year. This leaves a difference of $681.20.
You take out a 30-year mortgage for $300,000 at 5.16% with a monthly payment of $1639.93 and save an extra $681.20 per month. This savings over 30 years (360 months) grows to $684, 276 with a 6% rate of return.
You take out a 15-year mortgage for $300,000 at 4.67% with a monthly payment of $2321.13. Once you pay the mortgage off you continue to save $2321.13 per month for the subsequent 15 years. This savings would grow to $675,028 with a 6% rate of return.
I would say that scenario A beats scenario B. If not just for having an extra $9,000+, how about for having more liquidity if something were to happen. Or maybe because of paying more interest you would actually have more tax deductions and would technically pay less taxes over the 30 years. How about that?
Okay well let’s be fair what happens with different returns. I mean it is the power of compounding that gives scenario A the edge. The money there is compounded over a longer period of time. Well at 8%, scenario A: $1,015,233 and scenario B: $803,200. I guess that helps make my point. Let’s go the opposite direction with a return of 5%, scenario A: $566,935 and scenario B: $620,412.
For those of you with or thinking of a 30-year mortgage, I think this might just make you feel better about it. It can work better for you by providing more tax deductions, more liquidity and with solid returns you will be in a better financial position in the end.
For those of you thinking about a 15-year mortgage, can you get a 6% rate of return or better? That’s a big question.
Yes, I’ve probably oversimplified this a bit but hopefully it makes you think. That’s the point right?