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15-Year, Fast-Payoff Mortgage

The 15-year mortgage generally becomes popular when mortgage interest rates are lower, as consumers tend to refinance their 30-year fixed-rate mortgages with 15-year mortgages. It is just like a traditional 30-year loan except that its monthly payment is higher and it pays off in 15 years (see Figure 4.2).

Advantages. Because lenders get their money back sooner than with a traditional mortgage, they charge a slightly lower rate for 15- year loans. The difference varies from lender to lender, but if 30-

FIGURE 4.2 Amortization Chart for a 15-Year, Fast-Payoff Mortgage

Amortization Chart for a 15-Year, Fast-Payoff Mortgage

year loans are offered at 8 percent then you could expect 15-year loans to be at 7.75 percent.

Furthermore, because you pay off the loan faster, you borrow less money for less time and over the life of the loan you pay less total interest – more than 50 percent less (see Figure 4.3).

FIGURE 4.3 Comparison of a 30-Year and a 15-Year Mortgage: Total Interest Payments over the Life of a $200,000 Loan

Comparison of a 30-Year and a 15-Year Mortgage: Total Interest Payments over the Life of a $200,000 Loan

Like a 30-year fixed-rate loan, you have the security of knowing that your monthly principal and interest payment will not go up.

A 15-year mortgage is probably best suited for people who are planning to retire in 15 years and would like to “burn their mortgage" at their retirement party

Disadvantages. Your monthly payment is much higher. In the example in Figure 4.4, the monthly payment is 20 percent higher than that of a comparable 30-year loan. Because the monthly payment is higher, you must have a higher annual income to qualify for it.

In the example in Figure 4.5 (assuming the lender uses a 36- percent debt ratio), you would need to earn about 20 percent more to qualify for a 15-year loan. (See Chapter 2, “Qualifying for a Mortgage Loan,” for a full description of debt ratios.)

Although 15-year loans have been highly touted, many believe that 30-year loans are still better deals. With most mortgages today, you can make extra payments whenever you like to reduce your loan balance. Depending on the size and frequency of your extra payments, you pay off your loan in much less than 30 years. For example, if you make 13 payments a year instead of 12, you pay off a 30-year mortgage in about 20 years. With a 30-year loan, you have the flexibility of making the extra payments when you want to make them.

FIGURE 4.4 Comparison of a 30-Year and a 15-Year Mortgage: Monthly Principal and Interest Payment for a $200,000 Loan

Comparison of a 30-Year and a 15-Year Mortgage: Monthly Principal and Interest Payment for a $200,000 Loan

FIGURE 4.5 Comparison of a 30-Year and a 15-Year Mortgage: Approximate Income Required to Qualify

Comparison of a 30-Year and a 15-Year Mortgage: Approximate Income Required to Qualify

Think of a 15-year mortgage as a “forced savings plan.” You put money into your mortgage that you might otherwise invest in stocks, bonds, or other real estate. Depending on your investment alternatives, you may have better ways to invest your money than paying off your mortgage.

 
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