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15-year Fixed Rate Mortgages

How To Save Half On Interest Costs

Who It's For | Advantages | Disadvantages | Compare Them Yourself

Save $100,000 on mortgage interest costs! Sound impossible? Not really. An old-time mortgage that is once again proving popular allows homebuyers to so just that. It is the 15-year fixed-rate mortgage that lets homebuyers own their homes free and clear in 15 years. And, while the monthly payments are somewhat higher than a 30-year loan, the interest rate on the 15-year mortgage is usually a little lower, and importantly - the homebuyer pays less than half the total interest cost of the traditional 30-year mortgage. The purpose of this page is to help prospective homebuyers explore the 15-year fixed rate mortgage - a new option for saving on total mortgage interest costs.

Who It's For

The 15-year fixed rate mortgage has proved popular with two very different groups of homebuyers. First, it enables young homebuyers with sufficient income to meet the higher monthly payments to pay off the house before their children start college. They own more of their home faster with this kind of mortgage. Other homebuyers, who are more established in their careers, have higher incomes and whose desire is to own their homes before they retire, may also prefer this mortgage. The 15-year fixed rate mortgage gives them additional financing options using the house's equity. For example, they can easily take out a second mortgage if they want to make use of the equity in their home. But you need not fall into either category to appreciate the savings the 15-year fixed rate mortgage affords homebuyers. Let's take a closer look at some of the pros and cons of this type of mortgage and what savings you may expect.

Advantages

The 15-year fixed rate mortgage offers the qualified consumer five big advantages.

  1. You own your home in half the time it would take with a traditional mortgage.
  2. You save more than half the amount of interest of a 30-year mortgage. On a $75,000 mortgage at 9.5 percent, you save more than $95,000.
  3. Lenders usually offer this mortgage at a slightly lower interest rate than with 30-year loans - typically 0.5 percent to 1.0 percent lower. It is this lower interest rate added to the shorter loan life that realizes the savings for 15-year fixed rate borrowers.
  4. Fixed rate means exactly that - no matter where mortgage interest rates go, the payments for this mortgage stay the same from the first to the last. This helps many borrowers plan their budgets with more certainty. They know that their monthly payments will not increase (or decrease) and throw their financial planning off.
  5. 15-year mortgages can be insured by the Federal Housing Administration (FHA) and the Veterans Administration (VA), and with private mortgage insurance.

Disadvantages

The disadvantages associated with a 15-year rate mortgage are really the qualifiers that will tell consumers if this is the mortgage for them.

  1. The monthly payments for this type of loan are higher than those for a 30-year mortgage, roughly 10 percent to 15 percent higher per month.
  2. Because borrowers pay less total interest on the 15-year fixed rate mortgage, they lose the maximum mortgage interest tax deduction.

Compare Them Yourself

At right is a comparison of a $75,000 mortgage with terms of 15 and 30 years. We used a 15-year mortgage at a half percent lower rate, which is typical in today's market. As you can see, the 15-year mortgage saves more than $95,000 over the traditional 30-year loan.

  30-year at 10  percent 15-year at 9.5 percent
Monthly Payment (Principal and Interest) $ 658 $ 738
First Year Interest Cost $ 7,481 $ 7,023
Mortgage Balance $ 74,583 $ 72,625
Fourth Year Interest Cost $ 7,336 $ 6,244
Mortgage Balance $ 73,052 $ 63,991
Total Interest Cost Over the Life of the Loan $ 161,942 $ 65,970
Difference From 30-year Total $ 0 $ 95,972

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