Do you have a 30-year mortgage loan on your home? If so, you might be missing out on the huge savings a 15-year loan could offer. Since rates hit record lows in 2012, more people than ever are opting to use a 15-year loan to become mortgage free in half the time at a significantly lower total cost. Rates are expected to rise gradually going forward but there’s still time to refinance into a 15-year loan and take advantage of these 7 amazing benefits:
- Save BIG on interest and total payoff
For the vast majority of people who don’t pay cash for their home but take out a mortgage, they aren’t only buying the home but also buying the money to buy the home – and that is the most expensive part. In fact, with the typical $350,000 mortgage at a 5% interest rate, you’ll pay an alarming $676,395.24 in total payments – principal and interest – over 30 years. That means the interest you pay will account for 48.26% of every payment you make for 260 months!
However, a 15-year fixed rate mortgage drastically reduces the amount of total principal you pay. To compare apples to apples, that same $350,000 mortgage at a 5% interest rate (which is unusually high for a 15-year mortgage, but this is just for illustration’s sake) will yield $498,199.88 in total payments, allowing you to become mortgage free in half the time for a whopping total savings of $178,195.36.
While saving nearly $200,000 (in this hypothetical illustration) is reason enough to refinance into a 15-year fixed loan, there is more good news and six more reasons to take advantage of a 15-year loan.
- You’ll accrue equity much faster
The benefits of paying down your mortgage faster aren’t just realized at the “finish line” 30 or 15 years down the road, but almost immediately as you’ll accrue equity at a considerably faster pace. (Remember that there are three ways to accrue home equity: down payment, principal reduction, and when your home value appreciates.) In fact, since more of your payment will go towards paying off principal almost immediately (compared to your first payment on a 30-year loan that is about 96% interest!) the average home with a 15-year loan accrues equity three times faster than that of a 30-year loan over just a 5-year period.
- Become mortgage free in half the time
Obviously, a 15-year mortgage allows you to pay off your home loan in exactly half the time of a 30-year mortgage – 180 months instead of 360. Other than just the money you save in interest and total payoff, there are actually some huge benefits to writing half the amount of monthly checks to your mortgage company, and we’re not just talking about saving on 180 stamps to mail it in!
- Take advantage of the time value of money
It was Albert Einstein that said, “The most powerful force in nature is compounding interest.”
That leads us to our next benefit of a 15-year mortgage: taking advantage of the time value of money. Basically, you either are paying interest to someone else (your mortgage company) OR you are actually earning interest (and interest that grows at an exponentially increasing rate, or compounds) if you invest instead.
Hence, you have a time value of money. Simply defined, money since money can be invested to earn a return, the same amount of money is worth more today than at any point in the future. So per our mortgage illustration above, with a 15-year loan you’d have 180 payments worth of monthly payments you no longer needed to make, that you could choose to invest for 180 months that you no longer needed to pay. Of course we’re not investment experts, but ask your financial planner what good he or she could do with 15 year’s worth of mortgage payments and a 15-year head start and they’ll probably jump up from their desk and hug you!
- Pay off debt and other loans faster
So what can you do with those 180 payments you saved or “realized” with a 15-year mortgage? The wisest thing to do is usually accelerate all of your debt payments at that point (if you still have debt). Paying off car loans, credit cards, business debt, investment properties and any second mortgages allows you to become completely debt free. Think of that as a springboard to accumulating wealth and living a secure and comfortable lifestyle for the rest of your days, and since a 15-year mortgage saves you huge amounts of interest and 15 years, will allow you to start paying off all of your other debts much faster. By paying off business loans and mortgages on investment properties, you’re also accelerating your rate of return on investments.
- Fund college, retirement, and other life changes
Freeing up such a huge proportion of your hard-earned dollars on interest and mortgage payments allows you to start saving for important life events, especially retirement and college planning. With the cost of a college education skyrocketing over the last decade, taking out a 15-year mortgage might allow you to be mortgage free and have plenty of money saved by the time your children head off to university in the fall after high school. The same goes for saving for retirement –which are frighteningly underfunded in our country these days – and medical costs, etc. By utilizing a 15-year loan as a smart financial strategy instead of just a home loan, you could really enjoy your retirement and be full prepared for the big bills life will throw at you.
- Interest rates on 15-year mortgages are lower than for comparable 30-year loans
The big drawback of a 15-year loan is that the monthly payments are usually higher since you’re paying off the mortgage in half the time. But the great news is that it doesn’t mean your payments have to be double those of a 30-year loan. In fact, interest rates for 15-year mortgages are typically much lower than those for comparable 30-year loans, often a whole percent less. So although your monthly payment might be higher with a 15-year loan, you can still ensure it will be comfortable and reasonable (the lender still looks at your monthly debt to income ratio and won’t approve a loan payment you can’t afford.)
Since borrowers know they’ll be aggressively paying down their mortgage in half the time and saving so much money (turning their home pay off into a sprint, not a marathon), they often look at the option of paying discount points to reduce the interest rate even further from the onset, which can be a wise move for some.
Consider that we’ve also seen historically low rates for 15-year interest rates recently and the anticipated gradual rise of home loan rates as the Fed incrementally raised rates over the next 18 months, and the 15-year loan looks more and more like a bargain.
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Just how low are 15-year fixed interest rates? Contact us and we’d be happy to share today’s interest rates and run a few scenarios that show how much you could save with a 15-year refinance!