The Argument for 20, 15, & 10 Year Mortgages - Learn about the potential savings of financing a home with a 20, 15, or 10 year fixed rate mortgage product when compared to 30 year mortgages.
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You are here: DIME Home > Loans > The Argument for 20, 15, & 10 Year Mortgages
Learn about the potential savings of financing a home with a 20, 15, or 10 year fixed rate mortgage product when compared to 30 year mortgages.
Author: Nat Criss
Date: Sep 15, 2011 - 11:17:25 AM
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30 year fixed rate mortgage products are easily the most popular home financing solutions in the United States. Many people select a 30 year home loan because the mortgage's principal and interest payments are spread out over the course of a 360 month amortization period. The result is lower monthly payments than one would likely find with a 20, 15, or 10 year mortgage program.
The trade-off is that the amount of interest paid over the life of a 30 year mortgage is much greater than one would owe on a home loan with a shorter repayment period. Another benefit of shorter term fixed rate financing vehicles is that interest rates tend to move lower as repayment periods are reduced. For instance, on any given day a lender might offer a 30 year mortgage at 6.000%, a 20 year mortgage at 5.750%, a 15 year mortgage at 5.500%, and a 10 year mortgage at 5.375%.
Let's compare the amount of interest paid over the life of a $200,000 mortgage for fixed rate mortgage products assuming that they all have a 5.000% interest rate and no extra payments are made to pay off the loans faster.
Total Interest Paid:
30 year mortgage = $186,511.38 Total interest owed over 360 months
20 year mortgage = $116,778.76 Total interest owed over 240 months
15 year mortgage = $84,685.71 Total interest owed over 180 months
10 year mortgage = $54,557.24 Total interest owed over 120months
Interest Savings Compared to a 30 Year Mortgage:
With a 20 year mortgage= $69,732.62
With a 15 year mortgage= $101,825.67
With a 10 year mortgage= $131,954.14
Monthly Principal and Interest Payments
30 year mortgage = $1,073.64
20 year mortgage = $1,319.91
15 year mortgage = $1,581.29
10 year mortgage = $2,121.31
For obvious reasons, people are drawn to 30 year financing because they can often afford a much more expensive home while keeping their payment lower than they would be able to with a 15 or 10 year home loan. So, what loan amounts could people afford and keep their payments close to the amount of the 10 year payment used in the example above (at a 5.000% note rate)?
The 30 year mortgage monthly principal and interest payment on a $400,000 would be $2,147.29
The 20 year mortgage monthly principal and interest payment on a $325,000 loan would be $2,144.86
The 15 year mortgage monthly principal and interest payment on a $270,000 loan would be $2,144.86
The 10 year mortgage monthly principal and interest payment on a $200,000 loan would be $2,121.31
Would you be able to live in a 1,500 square foot bungalow instead of a 4,000 square foot home in order to save $186,511.38? Could you afford your mortgage payment if you lost your job for six months? What would the difference in taxes and insurance payment be for various home values?
These are the type of questions that almost every home buyer faces when deciding how much home they can truly afford. Over extending one's financial obligations can ultimately lead to mortgage default, foreclose, and/or personal bankruptcy. Consulting with a licensed mortgage professional, tax advisor, real estate professional, and financial planner can help you set your boundaries and come up with a plan that works for you and your family.
And, if you do opt for a 30 year mortgage, be sure to speak with your mortgage consultant about the advantages of making additional principal reduction payments periodically. A little bit can go a long way.
Nat Criss is a marketing professional with BurlingtonMortgage.biz, a web site where consumers can research mortgage programs such as 10 year mortgage loans and 20 year mortgage financing.
View all articles by Nat Criss
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