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Checking Out the Fifteen Year Mortgage

Consumers shopping for a mortgage typically think in terms of the interest rate and how that effects their monthly payment. The lower the rate the better. Borrowers are often shocked when they realize the amount of money they’ll pay in interest when their mortgage matures.

If you think you can’t afford to pay off your mortgage in half the time (15 years versus 30 years), you may be wrong. While the monthly payment is higher, the interest rate is a bit lower, which offsets part of the increase in the payment.

Most importantly, you end up paying less than half the interest over the life of the loan. If you borrow $100,000 for 30 years at 8 percent you will end up paying the lender over $264,000 ($100,000 for the principal loan amount and $164,000 in interest).

Now you ask yourself if you put $193 into your savings versus on your mortgage, would you be ahead in fifteen years? Well, $193 every month into a money market account, earning 4 percent interest your money would grow to $47,495 in fifteen years.

By paying the $193 monthly on your mortgage you would save interest and pay the loan off faster, yet lose your tax deduction on the home sooner. In reality, this is not as simple as it all sounds.

In summary, here are the pluses for a fifteen year mortgage:

• You build equity much more quickly

• You own your own home in half the time

• You save more than half the amount of interest

• The rate is typically lower than the rate on the 30-year mortgage and stays the same throughout the life of the mortgage

Checking Out The Thirty Year Mortgage

One reason 30-year mortgages are popular is their relatively low monthly payments. The lower the monthly payment, the easier it is to qualify for the loan. Marginally qualified borrowers would have a difficult time qualifying for the higher monthly payment and would have to settle for the 30-year loan.

If your primary motivation is to get the biggest tax break possible, you may want a 30 year loan with interest only payments. As your mortgage balance decreases so does your tax write-off.

Your personal financial situation should dictate which loan is best for you. For example, if your future income is uncertain, a 30-year mortgage with lower monthly payments will give you more control over your finances.

One of the best advantages of having a 30-year mortgage is you can make it into a 15 or 16 or 17 year mortgage if you desire. Lenders usually permit borrowers to make additional principal payments. When you have extra funds available you can apply this to your mortgage, but you’re under no obligation to do so.

But if you’re locked into a 15-year mortgage with higher monthly payments, you’re obligated to pay this amount each month no matter what. That’s why there is so much more freedom with a 30-year loan.

If you have a 30-year loan and plan to make principal payments from time-to-time, make sure that your lender doesn’t have the right to charge a prepayment penalty. Ask to have that in writing before closing on your new home.

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