Tuesday, February 16, 2010

15 year or 30 year mortgage?

I found this website that thinks on a very similar line with me. One of his latest posts talks about how to reduce your mortgage payments by $100,000. Something I've been thinking about doing.

Let's see if it is really worth it.
We currently have a mortgage of about $200,000 at 5.5% interest for 30 years. That's about $11k in interests for the first few years assuming making regular payments and minimum principal paid off, or about $1100 per month (excluding tax and insurance). 

The 15 year mortgage rate is around 4.5%. That comes out to be about $1500 per month (excluding tax and insurance) or an extra $400 a month. 

Total interest paid in 30 years is: $208k
Total interest paid in 15 years is: $75k
Extra payments @ 400/month in 15 years: $72k

So in actuality you have to put up an extra $400/month or $72k in accelerated principal payments in order to reduce your interest by $133k and mortgage by 15 years.

Scenario 2: Instead of changing our mortgage you save/invest the extra principal payments. 

After 15 years you would have about $139k left on your $200k mortgage.  If we put our $400/month for 15 years in our fancy calculator for future value at interest of 10% we would have $152k.  So what does that mean? 

I would be up about $19k.  That means if you were disciplined in saving and investing that extra $400 per month you would own your house with no mortgage after 15 years with a little bit to spare.

So there you have it... you save over $100k in scenario 1 and you are free and clear after 15 years.

What can a budget do for you?

1 comment:

  1. Update: I inquired about a refinance to a 15 year loan at 4.5%. Because of the recent drop in home prices, lots of short sales and foreclosures... the guy said my appraisal would be much lower than I hoped. Stick with our 30 year 5.5% loan and continue to pay it off.

    Ok, that's what I'll do.