Coffee, tea or milk? Capitalism has made consumer choices possible within every area of the American landscape. We select from hundreds of brands of computers, cars, airlines, banks and more. We choose between mortgage companies and mortgage products.
Even after we pick a product such as a fixed rate mortgage, there are even more considerations with regard to the mortgage term. The choice of the loan term may affect our long term economic plan, as well as, our short term consumer preference.
The difference between 30-year and 15-year fixed rate mortgages, easily the most popular consumer alternatives, are quite clear. The 30-year allows the lowest payment and achieves the greatest tax advantage because a larger portion of the mortgage is dedicated towards interest. The 15-year requires a larger payment, a greater portion of which is dedicated towards principal reduction and achieving the goal of rapid equity accumulation. Another advantage of a 15-year mortgage is it comes with a lower interest rate.
Here is an example for a $300,000 Mortgage.
Type Rate PI Payment
30-year 4.00% $1,432
15-year 3.25% $2,108
Note that these rates are hypothetical and the principal and interest payments are rounded. Not only will interest rates change over time, so will the spread between the mortgage alternatives.
Most consumers would prefer a 15-year mortgage. However, the higher payments are tough on family budgets and many may not qualify for the larger payment. Basically, the payment is almost 50% higher for a 15-year. Thus consumers choose the 30-year alternative the majority of the time.
However, we think consumers should not give up their dream of building equity. Therefore, we have introduced another alternative into the equation. This alternative is the 20-year mortgage. Please click on the link below to see how you can achieve a much greater saving on your interest expense without as dramatic and increase in your monthly payments.
The 20-year alternative may be just the mortgage alternative you are looking for.