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Today we constantly hear and read about the huge savings of a 15 year loan versus a 30 year loan. In fact, there is never any savings for the shorter term loan. The only advantage is that it is a forced savings plan for people who refuse to save in any other way. Usurers ignore the reality of compound interest, to their advantage and to your detriment.
The current interest rate for a 15-year loan is 20 to 40 basis points lower than for a 30-year loan. However, the monthly payment is still much higher. For example, a loan of $ 300,000 over 15 years at 2.2% will have a monthly payment of $ 1,958. For a loan of $ 300,000 over 30 years at 2.6%, the monthly payment is $ 1,201. Suppose over the 15-year period, the difference of $ 757 is invested at a conservative rate of 8% (the DJIA return for the past 30 years has actually been greater than 8%, not including dividend income) . At the end of the 15-year period, the 15-year loan has been repaid, but there is no return on the investment. The 30-year loan will have an outstanding balance of $ 178,854, but the return on investment will be $ 262,040. You have the option of keeping the loan or paying off the balance and pocketing the difference of $ 83,186. There is no penalty for early repayment of a mortgage.
Another disadvantage is the possibility of borrowing much less capital with the 15-year loan. For example, the 15-year 2.20% loan with a monthly payment of $ 1,958 will support the loan of $ 300,000. The 30 year loan at an interest rate of 2.6% with the same monthly payment of $ 1,958 will support a loan of $ 489,154. If you want to minimize monthly payments, choose the 30-year loan. If you want to maximize the loan amount, choose the 30 year loan.
As a final example, proponents of a 15-year loan point out that after 15 years you will save $ 4,533 in interest the following year. If they lend me that $ 4,533 now and let me pay them back this so-called savings after 15 years, so much the better. This will allow me to pocket a profit of $ 10,340 at the investment rate of 8%. Only fools ignore compound interest.
– Wallace G. Boersma, resident of Marshall
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