4 minutes to read

15 vs. 30 Yr Mortgage: Do We Not Care, or Do We Not Understand?

There are currently three people whom I know that are about to purchase a home.  To each of them, I proposed that purchasing their home with a 15 vs. 30 Yr Mortgage is a huge mistake.

I explained the numbers to them.

I explained how much interest that they will pay with a 30 year fixed rate mortgage over five years as compared to the 15 year fixed rate mortgage. I trid to use conservative estimates and said that they will pay $140,000 in interest payments alone with a 30 year 5% fixed rate mortgage on a $150,000 loan, but only $63,000 on a 15 year 5% fixed rate.

I explained that the monthly payments will only be a difference of about $400, but will pay off big in the long run.  Moreover, I further explained that if the $400 is not going towards their home, it will easily buy other things that they probably don’t need (i.e. car loans or increased dinner outings).

I took those numbers and I tried to explain to them that in 5 years, if their home’s value decrease, they will have no equity in their homes by using a 30 year fixed mortgage, and would have to come heavily out of pocket at that point if they were to sell their home. I told them that after 5 years of the 30 year $150,000 loan, they would still owe $137,000, but the balance on the 15 year loan would be only $111,000.

I explained to them that even if their home’s value increases it’s a win-win situation with a 15 year fixed mortgage because they will have equity in their homes, meaning that they could pocket the equity and any gain in the home’s value.

I’m wasn’t demanding in my approach at all, nor was I didactic.  I spoke this to them with a genuine concern. I even brought up how it was the biggest mistake that I had made a few years ago, and that I was speaking with regrettable experience.  So what’s the problem? Do we not care that WE prevent wealth purchasing thirty year mortgages, or do we not understand?

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