Why a 30-Year Loan Is a Better Choice Than a 15-Year Loan

November 20th, 2012 Filed under: Credit Cards — Credit Card Author

Given the incredibly low interest rates available, many people looking for loans are enticed by fixed-rate Oklahoma mortgages payable in 15 years. But the careful individual may still consider a 30-year loan the better choice.

The Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, estimates the average interest rates on 15-year fixed-rate mortgages offered by Oklahoma City lenders comes to 2.89 percent. There’s an apparent large margin of savings, not to mention the shorter term for paying off the mortgage.  But other factors must also be taken into account.

Shorter term means higher payments

The problem with choosing a 15-year loan is the higher monthly payments in comparison to a 30-year Oklahoma FHA loan. Based on Freddie Mac’s reported 2.89% monthly interest on a 15-year fixed-rate loan, borrowing $200,000 means paying $1370.91 every month, not counting homeowner’s insurance and property taxes. In comparison, the borrower would only pay $911.54 monthly for the same amount of loan, based on Freddie Mac’s posted rate of 3.62% monthly interest on a 30-year fixed-rate mortgage. That’s around $460 less in payment.

Overall, a 15-year mortgage charges an accumulated monthly interest of $47,000, whereas a 30-year mortgage demands a total of $128,000 in interest payments. Indeed, there’s a lot of money saved with a 15-year mortgage. The question, however, is whether you can afford the higher monthly interest payment or not.

Other expenses examined

Despite less than half in total interest payment, the 15-year mortgage actually puts the borrower in a tight condition. There’s no guarantee that the monthly mortgage payments can be paid all the time. Mishaps may arise, making you unable to pay. This can result to financial penalties and credit score reduction. Unable to pay further in the upcoming months will only make things even worse.

The problem does not end there. The savings may be lower than expected, after considering tax deduction due to mortgage interest.

Good money after bad?

There is no point in denying that the 15-year mortgage allows complete payment in a shorter amount of time, increasing your equity in assets and letting you see the day of completely owning a house without liabilities. If you want to obtain new financing on different terms for your home through HARP (the federal Home Affordable Refinance Program), for the reason, say, of being in negative equity, it lets you go back to positive shortly. But is this what you really want?

If you’re behind on your mortgage, the general consensus among financial advisors would be to cast doubt on speeding up your payments on an asset of lesser value than the balanced owed. Even if you’re not in the red with your monthly payments, boosting it on a depreciated asset may not be a reasonable use of your money.

Refinancing back into a 30-year mortgage is instead more sensible, despite an assumption that you have been paying on the original loan for more than a decade already. This way, monthly payments are subdued and there is less commitment on an asset of declining worth. If you’re lucky, the real estate market may boom again, increasing your home equity.



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