With interest rates on mortgages being extremely low, many people are looking to purchase their first home or possibly just a new one. What are the actual costs of two different types of popular mortgages? This post will examine the costs of a 15 year and 30-year mortgage. But first, which do you think will cost you more when considering a few different factors?
15 and 30-Year Mortgages
First, let us look at these two mortgages’ simple and apparent costs using BankRate. From this site, we now see that a 15-year mortgage with 20% down on a $305,000 house will have an APR of 2.875% and fees of $5,625, meaning we finance $249,625. This mortgage will have a monthly payment of $1,708.90 plus any taxes and insurance costs you may pay. And the final cost of this mortgage over the full 15 years ends up being $307,601.48.
For the 30-year mortgage, the scenario will remain the same with purchasing a $305,000 house with 20% down but doubles the mortgage term. The APR on this mortgage is 3.75%, and the fees are lower at $5,181, with financing at $249,181. This mortgage has a monthly payment of $1,154, resulting in a total cost of $415,358.58 plus any taxes and insurance costs.
So, now it is most likely apparent to you that the 15-year mortgage is $107,837.10 cheaper than the 30-year mortgage. So, at this point, you must ask yourself if you can afford the additional $554.90 in monthly payments. If you answer yes, you will most likely select the 15-year over the 30-year mortgage and save approximately $108,000. But does that save you money?
The cost you do not think about when comparing mortgages
Okay, we know that by taking out a 15-year mortgage, we spend an extra $554.90 per month servicing the 30-year debt. But what if you decided to opt for the 30-year mortgage and invest that $554.90 per month for the 30 years and not save the approximate $108,000? Well, you would have a nice nest egg saved up for emergencies and such. But how much are you ahead? That is also a great question to ask yourself.
You know the costs of the two mortgages, but now you will see what they cost you in opportunity and why the 30-year mortgage is the better choice. Okay, let us say you went with the 15-year pay it off one-time, and now you invest your monthly mortgage payment in an S&P 500 index fund. Now, the 50 year average of the S&P 500 is 10.9% annually, see Motley Fool. From years 16-30 of our mortgage cycle, you invest the $1,708.90 in a low-cost index fund, and you will have invested a total of $307,602. This investment should result in a portfolio value of $776,794.51. Not too bad as you now have saved $108,000 in interest payments and have an investment value of $777,000, disregarding taxes.
Now, what about the more expensive 30-year mortgage? If you had taken this route, you would have been able to invest the savings between the two mortgage payments of $554.90 each month for 30 years for a total invested amount of $199,764.37. If invested in the same low-cost S&P 500 index fund that returned 10.9%, you would have a total value of $1,536,545.30.
Yes, the 30-year mortgage cost you an additional $108,000 in interest payments. But you have also invested $107,837.63 less in the capital, meaning there are no savings between the 15 and 30-year mortgage. With no real savings between the two mortgages, you will simply lose $759,750.59 in investment value. Okay, so now I hope you can see that a 15-year mortgage, while on paper looks better, the 30-year is the best route if you are disciplined with your finances.
Please get in touch with me directly if you are in or near the Nashville, Tennessee, area for more information. If you are out of this area, you are still free to contact me or reach out to another qualified fee-only Registered Financial Consultant acting as a fiduciary.
And for those looking to buy or refinance a home, you may wish to consider consulting another Registered Financial Consultant or me to see what the costs are.
