The confusion of choosing between a 15 year mortgage and 30 year has been a common one prevailing among borrowers. Today i am going to throw some light on why a 15 year mortgage is better even if you have to increase your monthly installments and suffer for a few years.
When we have 30 years to pay a loan why should we take the trouble of paying it off in 15 years by increasing our monthly interest and suffering to make the ends meet every month? Well here is the reason.
One of the major advantages of opting for a 15 year mortgage is the lesser amount of total interest paid apart from its rate of interest being typically lower compared to the 30 year mortgage.Initially the money you pay is accounted only for the interest. As years go by the interest you pay on a monthly basis is allotted to compensate for the principal.
Imagine a person has taken a FRM for 15 years at the rate of 5% and another person for 30 years at the rate of 5.25% for a principal of $200,000, lets see what happens:
15 year 30 year
Monthly Payment $1581 $1104
Interest Paid $84,686 $197,587
Total $284,686 $397,587
With a 15 year mortgage you save about $112,901 which can be used for a constructive purpose.
June 4th sale of mortgage backed securities pushed mortgage rates higher. A highly eventful week witnessed MBS coupon price move 200 basis points low early last week and conversely raising the thirty year fixed rate from 4.87 percent to 5.37 percent by weekend. The thirty year fixed rates were at a 4.62 percent before May 27th Black Wednesday.
