I’ve been reading many articles recently about the choice between 15 and 30 year mortgages. One of the interesting things that occurs to me is how years ago my “rule of thumb” was that a 15 year mortgage was only about 20% more than the 30. This seems to have changes as we can see.
First, I set the mortgage amount at $200,000, and then calculated the monthly payments at various rates for both 15 year and 30 year fixed rates. You’ll note that I use a 15 year rate that’s 1/2% lower than the 30 for payment comparison. You can see history going back to 1991 comparing the two showing that the average difference is about that much. (Note: the chart has a drop-down menu, choose the 36 yr chart)
Next, I simply divided, to find out the extra payment required as a percent of the original figure, to reduce the mortgage from 30 years to 15. What I find interesting here is that when rates were higher, for me it seems like yesterday, it took at little as 17% extra to bring a 10.5% mortgage down from 30 to 15 years. Yet with today’s relatively low rates it’s actually tougher to do this, the payment will be more than 40% higher.
The choice of mortgages is a tough one. There’s a movement away from debt, an almost “debt is evil” mantra. Yet, it comes when we live in interesting times, a combination of historic low rates, concern about employment, and fear of inflation around the corner. It’s for these reasons that I’d caution against prepaying at the risk of not having an emergency fund (as much as a full year of expenses) at the ready. It also bears repeating that one should never pass up matched 401(k) savings especially if your employer offers a dollar for dollar match.
Is your mortgage your only debt? Are you paying it off early? Let me know what your approach is, and why.
Joe
