A little extra homework might make it possible for you to avoid the Great American Ripoff.
In this difficult housing market — with high mortgage loan rates and a dearth of home sellers because so many are locked in with much lower interest rates — the spread between the 30-year and 15-year rates may not seem very important if you are looking to buy a home.Most people work under the assumption that their only choice for financing a home purchase is to take out a 30-year mortgage loan.
To keep things simple and only compare fixed-rate loans , we can begin with the median U.S. home listing price of $440,000 in July, according to Realtor.com. For a “conforming” loan — that is, one which your lender can easily sell to Fannie Mae or Freddie Mac, and for which mortgage insurance won’t be required — the minimum down payment is 20%, unless you are eligible for a special government-subsidized program allowing a smaller down payment.
For the first monthly loan payment, only $276 is principal, while the rest is interest. Over time this reverses. For example, halfway through the life of the loan, your 180th payment will be weighted $808 to the principal, with the rest being interest. And at that time, you will have paid off $89,152 of the principal. That’s right — after 15 years you will still owe $262,848 on your house. Assuming you didn’t take out a second mortgage loan.
So for an extra $679.50 a month, not only do you get the loan off your back 15 years earlier, you save $309,056 in interest. Another argument against the shorter loan might be that you would make more money investing the $679.50 a month in the stock market. But would you have the discipline to do this? Or would the stock market have high enough returns during your investment period if you were to sell the home in five years? The beauty of the 15-year fixed-rate loan is that the savings on interest is guaranteed.
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