This section will show you some reasons why one might choose the 30 year program over the 15 year program. While you may think that this contradicts the 15 over 30year strategy it really doesn't. The key to each strategy is the borrowers themselves, what works for one borrower may not work for another. As you will see in the following example the key to making a 30 year program better financially is having the ability to save. Some borrowers prefer the structure of a 15 year loan to the one offered in this strategy.
Lets look at the same example used in the 15 year strategy:
Loan Amount of $125,000, closing costs identical
This is an example of how to use a 30 year program to your advantage. The key is in the ability to invest the monthly savings each month without ever touching the balances. Many people do not have the willpower not to touch an account with $50,000-$100,000 in it. These people may be better off with the 15 year program.
Option 1: 30 year rate of 7.25%
Option 2: 15 Year rate of 7.00%
|PROGRAM ||PAYMENT ||Cost of Total Payments
|30 Yr. Fixed ||$ 872.72 ||$306,979
|15 Yr. Fixed ||$1,123.53 ||$202,236
|Difference ||($270.81) ||$104,742
The key the to the 30 year strategy is the Investment Factor.
While the above comparison does show the savings resulting for the mortgage program it doesn't bring in the investment factor during the 15 year term. This is necessary to counter the $104,743 in extra finance charges (interest costs).
Think about this:
What if you opted for the 30 year program and invested the $270 per month in mutual funds that earned 10% per year.
Note: mutual funds are an investment option that may or may not pay gains and may even result in loses, for this example however we are assuming a 10% annual return over the 15 year term.
An investment of $270 per month for 15 years at an annual return of 10% would result in an investment account with a balance of $111,906. (note, this does not take tax liabilities into account, interest gains may be taxable so please consult an accountant)
The balance due on your 30 year mortgage at the end of 15 years would be just $93,411.
The end result is that at the end of the 15 year period you could write a check for the balance and still have $18,494 left over.
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