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-Year	30-Year	40-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.

Tags: Comparing Mortgages, 40-Year Mortgages, Mortgage Comparisons