When people speak about mortgages, it is almost always a conversation looking at the differences between a 30 year or a 15-year mortgage. But what about the middle route? According to statistics, in the year 2013, an overwhelming 89 percent of all mortgage borrowers opted for the 30-year mortgage and only 8 percent chose the 15-year mortgage. The survey also found that 3 percent chose an adjustable mortgage rate, while less than 1 percent selected the “other” category – a category that includes the 20-year mortgage option.
The question is why would the 20 year mortgage option be so neglected by borrowers?
I believe it is because 20 years combines the best of a 15 year and a 30-year mortgage option in one. Utilizing the median property price of $190,000 and removing a 20 percent down payment, the loan amount comes out to be approximately $150,000. This article will use the $150,000 figure as an example to compare the different mortgage loan options.
At the moment, the 30-year mortgage loan presents with a 4.125 percent rate. The 15-year mortgage loan offers a 3.375 percent rate, and the 20-year mortgage loan has a 3.75 percent rate. This means there is a 0.375 percent advantage for the 20-year loan as compared to the longer 30-year mortgage. If the amortization timelines remain the same, this particular advantage could save a borrower approximately $50 per month on their $150,000 loan.
A 30 year mortgage loan repayment, if the balance were $150,000, would be approximately $730 per month; however, it would be $889 per month if the mortgage were 20 years and $1,064 if the borrower opted for a 15 year mortgage loan. This means that the 20 year mortgage loan is cheaper than the 15 year loan by $174, but more costly than the 30 year mortgage loan by $163. Based on these findings, it can be concluded that the repayment amount for the 20 year loan is nearer the 30 year loan despite the payback schedule being closer to the 15 year mortgage option.
One of the best representations of the difference between the mortgage loans is by reviewing the remaining mortgage loan balance after 5 years. After the borrower has owned a home for 5 years, it may be necessary to move to a different location for various reasons (a new job, a growing family, better schooling). At this point, the average borrower using a 30 year mortgage loan for $150,000 should owe $135,950. If the borrower opted for the 20 year mortgage loan, they would owe approximately $122,290. It is the approximate $13,000 that can make the world of difference when selling a house.
As compared to the more extended 30 year mortgage loan, the 20 year mortgage can be repaid in full 20 years earlier; however, the 15 year loan can be repaid even earlier than that with an extra five years on your side. This means that you will receive 2/3 of the benefit from of 15 year mortgage loan. How is this advantageous?
Well, the average monthly repayment on a 20 year loan is 22.3 percent greater than the 30 year mortgage. Furthermore, the 15 year mortgage monthly payment is approximately 46.2 percent more than the 30 year loan. This means the additional monthly cost of the 20 year loan is merely 48.5 percent as compared to the shorter 15 year loan. Overall, the interest paid would an outstanding $111,711 on the 30 year loan but only $63,440 on the 20 year loan. Of course, it would be less interest on the 15 year loan with the amount being $41,350.
This is complicated, but it all shows that the 15 year loan can save a person approximately $70,340 and the 20 year loan can save $48,270 in interest. Overall, the 20 year loan is more beneficial as it saves 68.6 percent of the interest amount the 15 year mortgage loan would have saved.
It is human nature to search for the best deal available. Due to this, people will often refinance their houses if the interest rates fall. The only problem with refinancing is that the majority of homeowners will receive a renewed 30 year loan as soon as they refinance. This begins the amortization procedure from the start; thereby, adding time to the existing mortgage. Of course, the borrower can save money on the repayment schedule, but it is possible that they will end up paying larger amounts of interest. When refinancing, it is best to choose a mortgage loan that will not add time to an existing loan – this is why the 20 year loan is always a good option.
Prodigy Lending is a DBA of AmCap Mortgage, Ltd. (NMLS ID# 129122 – www.nmlsconsumeraccess.org/EntityDetails.aspx/COMPANY/129122), an Equal Housing Lender.
Managing RMLO: Jason Turner (NMLS #286357)