Forex Articles

The 30-year mortgage is the most popular home mortgage in America, according to the Mortgage Bankers Association. In February 2015, more than two-thirds of all mortgage applications, and 86% of all purchase applications, were for a 30-year mortgage. But many of those people are no doubt paying more to finance their home than they need to. (For an in-depth explanation of the two mortgage terms, see Comparison Of A 30-Year Vs. A 15-Year Mortgage.)

The chief advantage of a 30-year mortgage is the relatively low monthly payment. For example, on a 30-year loan for $300,000 at 4% interest, the monthly payment is $1,432, or about a third less than on a 15-year mortgage for the same amount at the same rate.

• The lower payment may allow a borrower to buy more house than they would be able to afford with a 15-year loan, since the same monthly payment would allow you to take out a larger loan over 30 years.

• The lower payment allows a borrower to build up savings, or save for other goals that have incentives, like college tuition in a 529 plan or in a 401(k) retirement account, which is both tax-deferred and has an employer contribution. (See, also, 4 Ways To Maximize Your 401(k).)

• A savvy and disciplined investor could take the difference between the 15-year and 30-year payments and invest it higher-yielding securities. Broadly speaking, such an investment will make money if the returns after taxes are higher than the cost of the mortgage less the interest deduction.

Over its lifetime, a 30-year mortgage is far more expensive than a 15-year mortgage.

• Because the cost of a mortgage is calculated as an annual interest rate, and you are borrowing the money for twice as long, you will pay at least twice as much for a 30-year loan. The higher the interest rate, the greater the gap between the two mortgages. At 4%, you will pay almost 2.2 times more in interest over 30 years than you would over 15 years.

• Because longer-term loans are riskier and more expensive for banks to fund, a 30-year mortgage typically comes with a higher interest rate – anywhere between a quarter point and whole point higher than for a 15-year mortgage.

• If your mortgage is purchased by one of the government-sponsored companies, like Fannie Mae, you may end up paying more in fees for a 30-year loan. Fannie Mae and the other government-backed enterprises charge fees called loan level price adjustments that often apply only to 30-year-mortgages. These fees typically apply to borrowers with lower credit scores, smaller down payments or both. The Federal Housing Administration charges higher mortgage insurance premiums to 30-year borrowers. Most borrowers ultimately pay these costs as part of a higher interest rate, rather than as upfront fees.

Over its lifetime a 30-year mortgage will cost you more. Take the example of a $300,000 loan, available at 4% for 30 years or at 3.25% for 15 years. The combined effect of the slower amortization and the higher interest rate means that borrowing the money for 30 years would cost $215,609, compared to $79,441 over 15 years, or nearly three times as much. One solution: Take a 30-year mortgage but make the larger payments of a 15-year schedule, assuming the mortgage has no prepayment penalty. You are entitled to direct the extra payments to principal, and if you make the payments consistently, you will pay the mortgage off in 15 years. And if times get tight, you can always fall back to the the 30-year schedule. (See also The Pros And Cons Of A 15-Year Mortgage.)