2 ways to save with 15-year mortgages

For those looking to buy homes, the most popular way to finance a home purchase is to take out a 30-year mortgage. With mortgage rates having been exceptionally low for years, it has been possible to get extremely attractive monthly payments even on relatively large mortgage loans, and the 30-year term gives homeowners a long time to get their mortgages paid off.

Yet what’s somewhat surprising is that relatively few people look at an alternative to the 30-year mortgage. A 15-year mortgage requires larger monthly payments, but the interest rates are almost always significantly lower. For instance, right now, a typical 30-year mortgage has an interest rate that’s more than a half-percentage point higher than what 15-year mortgages charge.

A half-percentage point doesn’t look like a lot. But when you compare the amount of interest you’ll pay on a 15-year mortgage at 4 percent compared to the corresponding amount on a 30-year mortgage at 4.5 percent, the difference is astounding.

You actually save twice with a 15-year mortgage. You have a lower rate, but the main reason why you pay so much more interest on a 30-year mortgage is simple: You take twice as long to pay down a 30-year mortgage. For example, on a $200,000 loan, monthly payments on a 30-year mortgage at 4.5 percent will be around $1,010. A 15-year mortgage at 4 percent will have payments of about $1,480. The $470-per-month difference pays down the principal balance on the loan much faster, and over time, that adds up to massive interest savings.