Buying a Home by Nancy Conner

Author:Nancy Conner [Conner, Nancy]
Language: eng
Format: epub
Tags: BUSINESS & ECONOMICS / Personal Finance / General
ISBN: 9781449379797
Publisher: O'Reilly
Published: 2010-04-13T00:00:00+00:00

In general, a shorter term lets you build equity faster. With each payment, more money goes toward the principal, so over the term of the loan you pay less interest and reduce the principal balance faster. For example, here’s what you’ve paid at the end of five years for the 15- and 30-year fixed-rate loans in the previous table:

Term

Interest rate

Interest paid after 5 years

Principal balance after 5 years

15 years

4.5%

$49,283.23

$184,534.43

30 years

5%

$60,095.11

$229,572.11

If the home’s value remains the same over those five years, you’ll have gained just over $65,465 in equity with the 15-year loan. That’s $45,037 more than the $20,428 in equity you’d accumulate with the 30-year loan.

Of course, to accumulate that extra equity, you have to be able to afford a higher monthly payment—about $570 more each month in this example. Lower, more affordable monthly payments are the main reason borrowers choose a longer-term loan. But as the tables show, interest adds up quickly with longer-term loans, even over a relatively short period of time.

If you’re trying to decide between a 15-year and a 30-year loan, your first consideration will probably be how much you can afford to pay each month. Many people choose 30-year loans because they’re willing to make the trade-off of paying more money in the long run for lower monthly payments now. They’ll sell or refinance long before the loan’s term is up, they figure, so they won’t pay the full interest of the 30-year term.

On the other hand, if your goal is to build equity faster or to pay off the loan and own your home outright as quickly as possible—and you can swing the higher monthly payments—you should consider a 15-year mortgage.

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