In 15 years you will thank me for this blog post.
The number one golden rule of money is always to “THINK LONG TERM”. When you look at your monthly mortgage payment on a 30-Year Mortgage vs. a 15-Year Mortgage, don't dismiss this super important golden rule.
Spending an extra few hundred dollars per month today, over time, could amount to the equivalent of an extra hundreds of thousands of dollars in your pocket!
Here are 5 quick reasons to help illustrate why you probably want to opt for the 15-Year Mortgage over the 30-Year Mortgage:
1. With a 30-Year Mortgage you build equity much slower! – Google a 30-Year Mortgage and run the amortization table. You will find that after the first 10 years of the mortgage, you pay tons of interest and very little principal. If you do what most people do and attempt to sell your home after 5 to 10 years, you will quickly find out how little equity you have in your home when you put it on a 30-Year Mortgage. No one tells you this when you are deciding on a 30 vs. a 15. The reality is this: the quicker you build equity in your home, the quicker you have more money in your pocket when you sell it, and therefore, the sooner you have more options!
2. With a 30-Year Mortgage you pay less each month, but you pay twice as much – If this sounds like a benefit to you, then you need to think again. You can pay a little less each month now and pay later, or you can pay a little more now, and reap the benefits later. Remember, money is ALL about thinking and acting for the betterment of your long term goals and future success. For the sake of your future self, take the hit and pay a little extra each month now!
3. With a 30-Year Mortgage you end up paying twice as much in interest – This one sounds like a no-brainer, but this fact seems to elude a lot of people when they buy a home. Why pay $200K in interest when you can pay $100K in interest. Interest is the cost of money, and in the case of a mortgage, it's the cost of the loan. Put another way, do you want to pay $15K for a car that sells for $10K, or would you rather pay $30K for that same car? That line of thinking applies to a home mortgage. Interest is a heartless monster when it comes to destroying your wealth. The less of it you pay, the better your financial life is.
THE ONLY INTEREST THAT MAKES MILLIONAIRES IS COMPOUND INTEREST. ANY OTHER INTERESTS SHOULD BE AVOIDED LIKE THE PLAGUE.
4. You pay higher interest rates with a 30-Year Mortgage. Again, see #2 above. The beauty of the 15-Year Mortgage is not only paying half the interest over the course of the life of the loan, but you are also receiving a lower interest rate. So you get a double reward, in terms of interest. Nice perk!
5. 15-Year Mortgages pay off in 15 years – Do you want 30 years of debt or 15 years of debt? Bottom line is you can help build your wealth and net worth in 15 years, or you can do it over the course of 30 years. Choose 15! That gives you 15 less years of your life without mortgage debt.
Yes, if you get a 30-Year note and invest the difference of what you would be paying on a 15-Year note, you very well may come out ahead. But the likelihood and chances of life not getting in the way of you actually doing that, is slim. Most people don’t have that kind of discipline, and things always come up.
Yes, if you get a 30-Year note and just pay extra on the house each year, you can pay down your house basically as fast as if you had a 15-Year note. But, again, the likelihood of you doing that without life getting in the way, is minuscule. The fact is, that things do come up, so if you don’t obligate your money on a 15-Year note, then following through with paying extra on your mortgage, or investing the difference, likely won’t happen. I don't want to sound negative, but I do want to be realistic.
My suggestion is simply this: Think about what is best for you long term, as in 15 years down the road. If that is to be still in debt and still strapped with hundreds of thousands of dollars of interest payments to go and 15 more years of making a mortgage payment, then have at it and get your 30-Year Mortgage. But if you want to have your home paid for in full, the entire price of that house added to your net worth, no more interest payments going into the hands of a bank, and no debt, then do what I did, and get smart, and get a 15-Year Mortgage. If that means re-financing, then do it.
In 15 years you will thank me for this blog post!