You would expect 15-year mortgages to be popular, thanks to their lower mortgage rates and steeply discounted costs over the loan term. But the reality is that many homeowners gravitate toward a 30-year mortgage, which makes buying a home affordable for the majority of Americans. Depending upon the mortgage amount and interest rate, the monthly payments for a 30-year term could be hundreds of dollars lower than those for a 15-year mortgage.
With this in mind, Motley Fool analysts Kristine Harjes and Nathan Hamilton talk in the video below about another reason homeowners may want to avoid a 15-year mortgage.
Kristine Harjes: Mortgages come in either 15-year segments or 30-year loans. The vast majority of people take the 30-year, although the 15-year can often look like a really good option. I mean, it's half the time length of obligation, which can sound really enticing, but there is one very good reason that we wanted to share with you today, why you should avoid a 15-year mortgage.
Nathan Hamilton: Yeah, there is one reason, and if you look at it, your income is not reliable. If you can categorize yourself and say that, "OK, I don't know where my income is going to be in even one, three, five years from now," you might want to think through whether or not a 15-year mortgage makes sense. Here's why, because if you look at the numbers behind it, a 30-year mortgage versus a 15-year mortgage, you got to pay down the same amount. If you're doing so over a 30-year term, of course your monthly out-of-pocket payment is going to be far lower. If you actually look at the numbers here, so I ran it and said, OK, for a typical mortgage, say $200,000 30 years versus 15 years. What's the actual payment difference? On a 30-year, you're looking at $834 per month at current interest rates. On a 15-year, that skyrockets a bit higher to $1,340.
Harjes: And of course you're saving money over the length of the entire loan--
Hamilton: You are. Absolutely.
Harjes: You would save in that example about $60,000.
Harjes: But if you consider the obligation of $834 a month versus $1,340 a month, that is really, really significant. If your income isn't necessarily reliable month after month after month, that might be a very good reason to look at the 30-year loan.
Hamilton: Yeah, and I don't know if you came across this article recently, but it was talking about how Warren Buffett, who obviously has a very reliable income, still chose a 30-year mortgage on his home. He didn't pay cash, he just got a mortgage and said, "OK, I'm going to do 30 years." Now everyone's financial situation is going to be different. Some people, a lot of people, it's going to make sense for a 30-year. Some its going to make sense for a 15-year. You can follow Buffett's advice or your financial advisor's.
Harjes: That is super interesting. I actually didn't see that article, thanks for sharing.
Hamilton: Yeah, it's funny to look through the article and read it.
Harjes: Yeah, and of course, it's important not to just blindly follow in the footsteps of Buffett-
Harjes: Or any other billionaire, or any other person. For that reason, it's just very important to be informed and know all of your options. For that reason, The Motley Fool has created a site called fool.com/mortgages. If you're looking at buying a home, please go see this site. There is so much good information on there. There's also a place where you can compare mortgage rates and you can calculate your monthly payment for a 15-year versus a 30-year mortgage. While you're at it, also you can get our free guide called "5 Tips to Increase your Credit Score over 800."
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