Mortgage Lengths – the Surprising Popularity of the 15-Year Mortgage

For most people, their home mortgage amounts to the most money they will ever borrow.  In Chapter 8 of Personal Finance, Turning Money into Wealth we look at “the mortgage decision” and lay out the steps you need to take to help you determine what you can afford to pay for your home.  There we take a look at several measures that help you gauge your ability to pay.

Remember Principle 2: “Nothing Happens Without a Plan” – you know we are talking about a financial plan and taking on a mortgage isn’t something to do outside your financial plan.  While you may qualify for a large mortgage, will that mortgage prevent you from achieving your other financial goals? Have you ever heard anyone say “…you don’t want to be house poor!”?  Go into a mortgage uninformed or ill-informed and it might put such a strain on your monthly budget that you can no longer maintain the lifestyle you want.  Before taking on that mortgage, or any other debt for that matter, make sure it fits in with your other financial goals.  And, more importantly, just because a bank is willing to lend you a large sum of money doesn’t mean you should jump at it.  Only you can decide just how much you’re interested in borrowing. Look at your own financial situation, monthly budget, goals, and lifestyle, and decide for yourself how much you want to take on.

Today, mortgage rates are at historically low levels, and if you’re applying for a home mortgage one question you’ll have to answer is whether you would like a 15- or 30-year mortgage.  The advantage of the 15-year mortgage is that it comes with a lower interest rate.  The disadvantage of the 15-year mortgage is that the monthly payments are higher – that’s because you’re paying off more of the principle each month.  According to the Wall Street Journal Article “Wanted: A 15-Year Home Loan,” the average 30-year mortgage rate is 3.53% while the average 15-year rate is 2.83%.

Class Discussion Questions:

  1. Go to the BankRate.com “Mortgage Calculator – 15-year or 30-year mortgage” and determine the monthly payment on a 15- and 30-year $200,000 mortgage at the rates mentioned in the Wall Street Journal Article “Wanted: A 15-Year Home Loan.” How much interest would you pay in the first 5 years, and how much interest would you pay over the life of the mortgage?  Which mortgage would you go for?  Why?  Be prepared to hand this in or discuss it in class.
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