- Bargaineering - http://www.bargaineering.com/articles -
The 15- vs. 30-Year Mortgage Savings Myth
Posted By Jim On 04/18/2008 @ 6:38 am In The Home | 37 Comments
If you’ve ever lamented the fact that you signed a 30 year fixed mortgage instead of a 15 year fixed mortgage (it was one of 8 regrets of 2007  for Trent of The Simple Dollar) because of how much money you could’ve saved, don’t. I’m going to do some simple Dinkytown.net (using this fixed mortgage loan calculator , but you can also use Bankrate’s mortgage calculator ) math to show that the difference between prepaying a 30 year fixed mortgage and a 15 year fixed mortgage is not big. The current rates on Bankrate (as of early morning on April 16th, 2008) for a 30 year fixed mortgage is 5.62% and for a 15 year fixed mortgage is 5.20%, so we’ll be using those. Rates have since changed but the analysis still holds.
If you had a $300,000 mortgage and made additional payments (~$677) onto the 5.62% 30-year mortgage such that the payments matched the 5.20% 15-year mortgage (~$2403), the difference in total cost (principal and interest) is ~$19,153 pre-tax across fifteen years. After you discount it by your marginal tax rate (say 25%), divide it across the 180 months, it’s only $79.80 a month. $80 difference on a $2403 mortgage payment is 3.3%.
You might say: “Jim, you’re just conveniently ignoring the $19,153 and focusing on the smaller monthly number of $80 – that’s just mathematical hocus-pocus. I’m upset about the $19,153! Also, $80 might not be a lot to you Mr. Money-bags, but I’d rather have that money than give it to a mortgage company.”
To which I would respond: “Ah, good point, but let us calculate the present value of that $80 a month and see how much it’s really ‘worth’ to us today. As for the $80, I too would rather have it in my pocket, but I’m not going to cry over spilled milk.”
If you assume that inflation will be at 4% a year, 180 payments of $79.80 is worth approximately $10,788 today (if I did it right in my TI BA-II Plus calculator). It’s a $10,788 difference on a $300,000 mortgage. Ten thousands dollars isn’t a trivial amount of money, but that’s the cost of having the flexibility to make the 30 year payment into a 15 year payment if you want to. If you have a 15 year mortgage, you are required to make that payment.
Lastly, if you still are bothered about the difference, you can always refinance.
Article printed from Bargaineering: http://www.bargaineering.com/articles
URL to article: http://www.bargaineering.com/articles/15-vs-30-year-mortgage-savings-myth.html
URLs in this post:
 Tweet: http://twitter.com/share
 Email: mailto:?subject=http://www.bargaineering.com/articles/15-vs-30-year-mortgage-savings-myth.html
 8 regrets of 2007: http://www.thesimpledollar.com/2008/04/15/eight-personal-finance-regrets-from-the-past-year/
 fixed mortgage loan calculator: http://dinkytown.net/java/MortgageLoan.html
 Bankrate’s mortgage calculator: http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx?pid=p:brg
Thank you for reading!