15 Year Mortgage
The housing downturn and subsequent recession have caused people to rethink their deal with to home ownership in the coming years. Gone are the days of free-spending, variable rate mortgages that have made countless millions of Americans house-poor.
As a result, there has been a reflexive backlash against long-term committment and speculation. The end product has been a rise in the availability of the 15 year mortgage, which previously had only existed in fables like unicorns and the sasquatch.
That said, the 15 year mortgage is really somewhat attractive if you’re in an appropriate economic situation. The key is to know your situation and what you must expect out of your mortgage, and how much you stand to save by opting with a 15 year mortgage instead of the more standard 30 year mortgage that was industry standard for decades.
The reason you can save money on a 15 year mortgage instead of a 30 year mortgage is that, generally speaking, the 15 year mortgage will have a lower interest rate and you’ll therefore be spending less money over the life of the mortgage to eventually own your house in full. It’s a simple concept, one that I intuitively jumped to myself.
But, I’ve just done a bit of research and come up with a few websites that consider the 15 year mortgage to be a sucker’s bet. One of them, themortgagereports.com, goes into excruciating mathematical point as to why you’re better off avoiding the 15 year mortgage and going with the standard 30 year mortgage. Their reasoning is as follows:
Mortgage interest is tax-deductible. In plain English, deduct the amount of mortgage interest you paid in a year from your real earned income and that is the amount against which you pay taxes. Again, talk to your accountant for particulars.
Later, they go into point on point numbers:
At Year 15, the total savings account weigh is $160,280.38
At Year 15, the principal weigh remaining on the 30-year fixed mortgage (from our amortization chart above) is $140,549.29
Spelled out: the savings account that we so diligently funded with the “superfluous savings and deductions” from choosing the 30-year mortgage will have earned enough interest to pay off the entire mortgage weigh in full in fewer than 15 years! This is using the power of the mortgage interest tax deduction to its fullest.
The 30-year mortgage becomes a 14-ish year mortgage just by making a part of your 15-year mortgage payment to your lender, and a part to your savings account where it can accrue interest and compound.
So to me it seems like the key is to know your tax benefits, save diligently and stick to the 30 year mortgage instead of the 15 year mortgage.