30 Years of Payments? Pshh, Make Mine 15!

The mortgage norm is a 30 year fixed, rate loan.  It's not a bad norm, nor even a rip off; it's just usually the most affordable option for many home buyers.  The banks break down a lot of numbers & figures for you, but there is one that may be overlooked: the bottom line for them.  Did you know that over the 30 years of minimum payments, you will end up paying almost twice as much as you originally purchased the home for?  No kidding!

Here's the math for a $200,000 home loan:

30 year loan @ 4.5% = $1,015 monthly

12 months x 30 years = 360 months

360 months x $1,015/month = $365, 400 

Typically, on a shorter loan, you will get a lower rate.  This is reflected below.

15 year loan @ 4% = $1,480 monthly

12 months x 15 years = 180 months

180 months x $1,480/month = $266,400

The difference between the original loan amount and final sum is astonishing.  This is especially true because a 4.5% rate on a 30 year loan is considered very good. (You can do the math for a 6% or 7% loan, and there's a tad difference.)  Over 15 years, on a $200,000 loan @ 4%, you will pay about $66,000 in interest.  Over 30 years, on a $200,000 loan @ 4.5%, you will pay about $166,000 in interest.  You can decrease your number of payments by half, and decrease your interest by 60% ($100,000 in this case), just by increasing your monthly payment by $400, or 40%.  This happens because you pay the most towards interest during the early life of your loan.  For the first couple years, only about $250 goes towards your principal, and about $750 to interest.  Around the 30th year, you finally pay about $700 towards principal, with only $300 towards interest.  This is why the interest rate you get is important, but so is the amount of time you take to pay it off.
Now, keep in mind, 15 year mortgages are best suited for people in the best financial situations.  I am talking about little to no debt, a good rainy day account, and a very secure career.  You don't want to forcibly stretch yourself too thin.

The best thing to do, in my opinion, is finance your home through a 30 year mortgage, at the lowest rate you can find.  (And please do shop around, because loans are the bank's product.  Different banks will give you different rates.) So, finance a 30 year mortgage, and if you are able, make the payments of the 15 year mortgage. It is amazing how much bigger of a dent you make in the loan that way!  This is a more flexible decision, because if money gets tight down the road, you don't have to pay the extra amount towards principal every month.  You can pay your regular minimum monthly payments of the 30 year loan.  It will take some self control and commitment, but I know you can do it, and later on, you will be glad you did.