If you possess the right information, it can mean the difference between landing a mortgage bargain versus ending up with a high payment each month. That's why it pays to know the mortgage essentials, including facts that some people often get wrong.
In the video segment below, Motley Fool analysts Nathan Hamilton and Kristine Harjes talk more about one mortgage blunder some homeowners make when considering either a 15-year or 30-year mortgage.
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Kristine Harjes: The typical question that people looking at getting a mortgage ask themselves is, "Should I get a 30-year or a 15-year mortgage?" I think a lot of people have this idea that a 15 year will be roughly half the cost of a 30 year, but that is actually completely false.
Nathan Hamilton: Yeah, if you actually look at the numbers, the difference in cost is far greater than, say, half the cost, and we've got an example here working through the numbers of what a 15-year mortgage would cost versus a 30-year mortgage. Of course, you're going to have a higher payment for a 15-year mortgage. In some cases, some people will have to go with 30 years, but on an average mortgage, which is around $309,000, the interest cost for a 15-year mortgage is about $81,000. Now, double that period to a 30-year mortgage, you're looking at a total interest cost of being $222,000. If you work out the numbers there, the 15-year mortgage is about a third of the cost of what that 30-year mortgage would be. It's all based upon amortization and paying down principal, and being charged less interest over a shorter loan term.
Harjes: Exactly, and of course, it can be very difficult to make the payments on a 15-year mortgage, so it's important to have a well-rounded view of your finances, and know what exactly you can afford. But if it's something that fits into the budget, this is a way that you can save a ton of money on buying a home.
Hamilton: You mentioned monthly payment, and if you look at it, a 15-year mortgage in our example is going to be $2,171 for the monthly payment. Now, on a 30-year mortgage, this makes it a lot easier, accessible, for people to buy a home. The payment is $1,475. Of course, you are paying more each month, but you are paying down that loan faster at less interest.
Harjes: Right. It sounds great, but the cold, hard truth is that 90% of people do get a 30-year mortgage. There is a reason for that: It allows you to buy more home and to have that lower monthly payment. Just make sure to run the numbers.
If you're looking to do that, please visit Fool.com/mortgages, and you can get started finding a low rate. You can compare 15-year mortgage rates to 30-year mortgage rates, and you can get access to highly rated lenders, as well as our free guide, Five Tips to Increase Your Credit Score Over 800.