AllFinancialMatters

A personal finance blog dedicated discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.

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Thursday, June 16, 2005

Comparing 15, 30, and 40 Year Mortgages

They aren't new. They have been around since the 80s but died out until now. I'm talking about 40-year mortgages. With the price of housing increasing so fast, lenders are now offering longer-term mortgages so that people can afford to buy houses. Of course, these longer-term mortgages come with a price. As the table below shows, the longer you stretch out the term of the loan, the more interest you pay.


15-Year30-Year40-Year

Interest Rate

5.20%

5.56%

5.81%

Loan Term (Years)

15

30

40

Payments per Year

12

12

12

Total Number of Payements

180

360

480

Amount Financed

$100,000

$100,000

$100,000

Monthly Payment Amount

$801.25

$571.56

$537.03

Total Payments

$144,225

$205,761

$257,773

Total Interest Paid

$44,225

$105,761

$157,773


The person who uses the 40-year option in this example pays over $100,000 more in interest over the course of the loan than the person with the 15-year mortgage. This isn't necessarily bad. With a low enough interest rate, one can argue that it might be wise to stretch out repayment of the mortgage as long as possible and put the difference to work in a Roth IRA. There is certainly some merit to this strategy. However, it is important that if you go this route, that you actually follow-through otherwise, you'd do much better with the 15-year mortgage.

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