If you possess the right information, it can mean the difference between landing a mortgage bargain versus ending up with a high payment each month. That's why it pays to know the mortgage essentials, including facts that some people often get wrong.
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In the video segment below, Motley Fool analysts Nathan Hamilton and Kristine Harjes talk more about one mortgage blunder some homeowners make when considering either a 15-year or 30-year mortgage.
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Kristine Harjes: The typical question that people looking at getting a mortgage ask themselves is, "Should I get a 30-year or a 15-year mortgage?" I think a lot of people have this idea that a 15 year will be roughly half the cost of a 30 year, but that is actually completely false.
Nathan Hamilton: Yeah, if you actually look at the numbers, the difference in cost is far greater than, say, half the cost, and we've got an example here working through the numbers of what a 15-year mortgage would cost versus a 30-year mortgage. Of course, you're going to have a higher payment for a 15-year mortgage. In some cases, some people will have to go with 30 years, but on an average mortgage, which is around $309,000, the interest cost for a 15-year mortgage is about $81,000. Now, double that period to a 30-year mortgage, you're looking at a total interest cost of being $222,000. If you work out the numbers there, the 15-year mortgage is about a third of the cost of what that 30-year mortgage would be. It's all based upon amortization and paying down principal, and being charged less interest over a shorter loan term.
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Harjes: Exactly, and of course, it can be very difficult to make the payments on a 15-year mortgage, so it's important to have a well-rounded view of your finances, and know what exactly you can afford. But if it's something that fits into the budget, this is a way that you can save a ton of money on buying a home.
Hamilton: You mentioned monthly payment, and if you look at it, a 15-year mortgage in our example is going to be $2,171 for the monthly payment. Now, on a 30-year mortgage, this makes it a lot easier, accessible, for people to buy a home. The payment is $1,475. Of course, you are paying more each month, but you are paying down that loan faster at less interest.
Harjes: Right. It sounds great, but the cold, hard truth is that 90% of people do get a 30-year mortgage. There is a reason for that: It allows you to buy more home and to have that lower monthly payment. Just make sure to run the numbers.
If you're looking to do that, please visit Fool.com/mortgages, and you can get started finding a low rate. You can compare 15-year mortgage rates to 30-year mortgage rates, and you can get access to highly rated lenders, as well as our free guide, Five Tips to Increase Your Credit Score Over 800.
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