Don't Be Seduced by 15-Year Mortgage Rates
By Ric Edelman
30-year loans are still better
Mortgage interest rates are at record lows. If you haven’t refinanced lately, you should consider it. And when you do, do not be tempted to obtain a 15-year mortgage. Instead, stick with the 30-year loan. Here’s why.
Let’s say you are refinancing a $250,000 loan and have two choices, as shown below.
With the 15-year loan, it seems you’d save $144,614 in interest by paying just $539 more each month.
But that’s not true. The above compares the interest you’d pay over 30 years versus the interest you’d pay over 15 years. It’s more accurate to compare what happens with each loan after the first 15 years.
During the first 15 years of a 30-year loan, you’ll pay a total of $151,280 (or 68% of your payments) in interest. That means 68% of your payment is tax-deductible. With the 15-year loan, only 26% of your payment is interest — meaning much less is tax-deductible.
What does that mean for you? Let’s say you are in the 25% tax bracket.
15 Years Later:
Not only does the 15-year loan force you to pay an extra $539 a month, you’ll also spend an extra $116,077 in interest!
And if you were to invest that $539 difference at an annual return of 7%,** you’d accumulate $170,843 — enough to pay off the $169,710*** balance that’s left on your 30-year loan after 15 years!
When weighing whether to refinance, contact us to help you make the right decision. As the above demonstrates, the best choice is not always obvious.
To learn more about mortgages, including Ric’s 11 Reasons to Carry a Big, Long Mortgage, read the newly revised edition of The Truth About Money, available December 21.
*Assumed interest rate and monthly payment are for illustrative purposes only.
**Assumed 7% rate of return for illustrative purposes only.
***Assumes a federal tax bracket of 25%, no withdrawals and no dividend reinvestment.