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15 Year Mortgage

Someone once said compounding interest is the eighth wonder of the world. So where is it most likely to affect the average American? In their home mortgage. As of 2017. The average new home mortgage balance (the amount borrowed) is $260,386(1). Based on current interest rates, financing this with a 15-year mortgage vs. a 30-year mortgage would save $107,014.52 in interest if paid off uniformly.

The 15-Year vs. the 30-Year Mortgage

The average 30-year fixed mortgage APR today is 3.78%(2). The average 15-year fixed mortgage APR is 3.23%(2). With an average new mortgage amount of $260,386. By financing this with a 15-year fixed-rate mortgage and making your payments on time. A borrower will save $107,014.52 in interest paid over the course of the loan. That is with today’s historically low-interest rates. Traditionally home mortgage interest rates have been considerably higher.

So, if there is an easy trick to buy your home for 100,000 dollars less, this must be the most popular mortgage type? According to a sampling by the bureau of labor statistics. Between 2004- 2014, 15-year fixed rate mortgages were only about 15% of new mortgages. 30-year fixed rate mortgages made up 61.5% of new mortgages in the same time(5).

So why do so many more people choose a 30-year mortgage over a 15-year? The payment is a large part of the reason. The payment on the same 15-year mortgage is $1,830.19 vs $1,212.36 for the 30-year. A difference of $617.83 per month. That's a very nice car payment, but to save $100,000, or become a millionaire, is it worth it?

By financing the average mortgage of approximately $260,000 today at 30-years; a borrower making their payments will end up paying back over $435,000 to their lender. That is $175,000 more than the amount borrowed. Explained in another way. If you bought a home for $300,000 on a 30-year fixed mortgage and borrowed the average amount to purchase the home. By making your monthly payments, you would end up paying over $475,000 for your $300,000 home! That same home on a 15 year borrowing the exact same amount would cost you just a little less than $369,000.

Well, I'll just get the best of both worlds. I'll finance my home a 30-year mortgage and pay it like a 15-year mortgage. That way if there is an emergency, we're covered. Mathematically that is correct, but we leave it to Dave Ramsey to answer that.

Myth: "I'll get a 30-year mortgage, but I'll pay it like a 15-year mortgage, so if something goes wrong I'll still have wiggle room."

Truth: Something will go wrong, avoid 30-year mortgages.

If you say, "Cross my fingers and hope to die, I promise, promise, promise I will pay extra on my mortgage because I am the one human on the planet who has that kind of discipline," you are kidding yourself.

Sick children, bad transmissions, prom dresses, high heat bills, and pet vaccinations come up, and you won't make the extra payments. The FDIC says that 97.3% of people don't systematically pay extra on their mortgages(6)."

I Still Haven't Heard the Word Millionaire

This is great and all, but you promised to make me a millionaire. What could $100,000 dollars in interest savings do in retirement? Say you bought your home at 25yrs old on a 15 year fixed mortgage. If you borrowed the average amount of 260,386 dollars, your expected payment would be $1,827.12 (P&I).

Since its inception in 1926, the S&P 500 index has made an average annual return of approximately 10-11%(7). If you took your house payment of $1,827.12 and invested it monthly in a market returning 8% annually starting at age 40. At age 50, it would be worth $329,108.66. At age 60, it would be worth $1,039,629.58. At age 67, or full social security retirement for those born after 1959, it would be worth $1,984,452.46. That’s in addition to owning a paid for home and any other investments you’ve accrued. Compound interest, maybe it is the eighth wonder of the world.

Sources:

  1. U.S. Mortgage Rate Statistics
    Home Mortgage Disclosure Act, Consumer Financial Protection Bureau
  2. BankRate
  3. Freddie Mac 30-Year Fixed Rate Mortgage 
  4. Freddie Mac 15-Year Fixed Rate Mortgage 
  5. Consumer Expenditure
  6. Dave Ramsey: Truth About Mortgages
  7. S&P 500 Index 

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