Choosing a 15 year amortization is a very popular borrowing strategy. The key to being comfortable with a 15 year amortization is feeling comfortable with the payment. By choosing a 15 year term you will pay more per month due to the faster amortization of the loan. This results in forced savings as the increase in the payment all goes to paying down the principal. An added benefit is the fact that in most cases you can obtain a lower rate with the shorter term loan.
Loan Amount = $125,000: closing costs identical
Even over the short term the 15 year provides the benefit of reducing principal and increasing your equity, this can be considered forced savings:
Option 1: 30 year rate of 7.25%
Option 2: 15 Year rate of 7.00%
|PROGRAM ||PAYMENT ||Cost of Total Payments
|30 Yr. Fixed ||$ 872.72 ||$306,979
|15 Yr. Fixed ||$1,123.53 ||$202,236
|Difference ||($270.81) ||($104,742)
By choosing the 15 year amortization you will pay an additional $48,746 ($270 x 180 months) and save 15 years of payments.
Net Savings: $55,997 ($104,742- $48,746).
Example: (continuation of the above example)
If you are interested in more comparisons please make sure to read the "30 year over the 15 year" section. This is another viewpoint that some may find even more attractive. Remember people choose programs based on their financial needs, goals, and histories.
|Program ||Balance after 5 yrs.
|15 Yr. Fixed ||$ 96,766
|30 Yr. Fixed ||$1187,973
Note, $16,249 is simply the forced savings of the $270 per month for five years. The additional $4,958 is the savings from the lower rate. In any case in this example if you were to sell your house after 5 years you would have an additional $21,207.
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