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What are the advantages to shorter home loans?

Q: How much money can I save by getting a 15-year loan instead of a 30-year loan?

A: A lot. Your savings start with a lower interest rate. The average cost of a 15-year mortgage is more than three-quarters of a point less than the average cost of a 30-year mortgage. You’ll also save money because you’ll be cutting the term and amortization of the loan in half. Consider that on a $175,000 mortgage for 30 years at 3.99 percent, you’ll pay $125,000 in interest over the life of the loan. But with a 15-year mortgage at 3.10 percent, you’ll pay only $44,000 in interest.

Another advantage is that you’ll build equity in the house much faster. By year five of that 15-year loan, you’ll have paid off almost $40,000 of the principal and owe only $135,000. With a 30-year loan, you’ll have only paid $13,418 in principal and still owe $161,000.

Q: I can afford the larger monthly payment required for a 15-year mortgage loan, so I should definitely choose this program. Right?

A: Often but not always. The monthly payments on a 15-year loan can be almost 50 percent more. In the example above, the monthly principal and interest on a 30-year loan would be $834. For the 15-year loan, it would be $1,216. Even if you can afford to swing that bigger monthly payment there are potentially big opportunity costs and several key questions you should consider.

Since mortgage rates are so low, can you come out ahead by investing that $382 difference?

Do you rely on a mortgage interest tax deduction to offset other sources of income? At what age do you want to have your house paid for?

There’s no one-size-fits-all answer, it’s a factor of individual circumstances and preferences. One flexible option is to take the 30-year and make extra payments. In the example above, if you paid $150 extra with each mortgage payment, you’d pay $90,000 over the life of the loan and pay it off in 23 years.

That option would allow you to pay more on your mortgage in years when you think it’s beneficial and pay the minimum when you’d rather invest that money.

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