How a 15-Year Mortgage Reduces Borrowing Costs

Outright Home Ownership Sooner with Less Interest Paid

Jun 2, 2009

A 15-year mortgage reduces the amount of interest paid and means outright home ownership is achieved sooner. Find out how to reduce borrowing costs significantly.

Whilst the 30-year mortgage has traditionally been the loan of choice, the 15-year mortgage has grown in popularity in recent months. First American CoreLogic, a San Francisco real estate consulting company, recently stated that the number of 15-year loans had increased from 42,178 to 74,497 between January and February 2009.

Less Interest Paid with a 15-Year Mortgage

The shorter loan duration means that a homeowner can substantially reduce the cost of borrowing with a 15-year mortgage. In the example below, the cumulative amount of interest paid is $197,578 more than on a 30-year mortgage deal; this is more than double the amount paid on a 15-year loan.

Achieve Home Ownership and Build Equity

Home ownership can be achieved more quickly with a 15-year mortgage. Equity is developed sooner which helps protect families against negative equity in the event of a property slump. Homeowners with a 30-year mortgage are paying interest for many years to come.

A 15-Year Mortgage Means Higher Mortgage Payments

Whilst the cost of borrowing is lower due to less interest being paid over the duration of the loan, a 15-year loan means higher mortgage payments. These increased payments can place a strain on family finances and increase the likelihood of repossession. It may be possible to extend the term of the loan in the event of financial difficulties.

15-Year Mortgage Vs 30-Year Mortgage

Mr Smith takes out a 15-Year mortgage for $350,000 at 5%. He makes a monthly mortgage payment of $2,767.78. The total amount paid is $498,200; the interest paid is $148,200.

Mrs Philips opts for a 30-year mortgage for $350,000 at 5.25%. She makes a monthly mortgage payment of $1,932.71. The total amount paid is $695,778; the interest paid is $345,778.

* Whilst the interest paid is $197,578 less on a 15-year loan, a homeowner will need to make an extra mortgage payment of $835.07.

Borrowing costs are substantially higher on a 30-year mortgage because more interest paid due to the extended term of the loan. A 15-year mortgage means higher mortgage payments, but equity can be built faster and outright home ownership will become a reality considerably sooner. Affordability is essential as a homeowner must be able to afford the higher payments.

Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.

The copyright of the article How a 15-Year Mortgage Reduces Borrowing Costs in Home Mortgages is owned by Asa Ghaffar. Permission to republish How a 15-Year Mortgage Reduces Borrowing Costs in print or online must be granted by the author in writing.