Where a 15-Year Mortgage Beats a 30-Year One

                                                

A 15-year mortgage is a tough call for households in hot housing markets.

Home buyers who havent seen a rate increase in nearly 10 years, can be tempted by lower-rate 15-year mortgages even though the Federal Reserve has finally raised rates. But do the advantages of a 15-year mortgage outweigh the costs? The answer depends partly on where you live.
We’ve crunched the numbers for the largest U.S. metros, and found that:
  • With the median US household income, a 30-year mortgage allows homebuyers to purchase 46% more house, but a 15-year mortgage provides triple the paid equity in just 5 years.
  • Homebuyers in areas where prices have a history of rising will benefit greatly from faster equity-building with a 15-year mortgage.
  • Buyers in areas with historically slow growing to flat housing prices will benefit less from shorter-term mortgages and potentially more from the borrowing power of a 30-year loan.






The primary advantage of a 30-year mortgage is lower monthly payments. On the median valued U.S. home, a 30-year mortgage comes with a payment that is $320, or 27%, lower than a 15-year mortgage. Lower payments also mean that a borrower’s debt-to-income (DTI) ratio is lower than a 15–year loan. This allows middle class buyers (a household earning the U.S. median income) to borrow $77,000, or 46%, more with a 30-year mortgage than a 15-year. Last, borrowers with a 30-year mortgage can write off nearly $68,000 more than a 15-year mortgage via the mortgage-interest deduction on their federal income taxes.

A 15-year mortgage has three advantages over a 30-year mortgage:
  • Equity builds faster
  • Interest rates are lower
  • Loan term is shorter
The primary advantage of a 15-year mortgage is that a larger share of each monthly payment goes towards paying off the loan principal. After five years (the number of years the average young household moves), equity gained from paying off the loan balance is more than $39,000, or three-times greater with a 15-year mortgage on the median value home. In addition, the 15-year rate is 3.36%, compared with 4.12% for a 30-year note. And over the loan term, borrowers with 15-year mortgages pay just under $40,000 in interest with a 15-year compared to over $107,000 with a 30-year on the median value home.
In Bargain Markets, 15-year Mortgages Are A Homebuyer’s Best Bet For Equity
Home equity can come from three sources: down payment, principal reduction, and home value appreciation. This means that in markets with slow appreciation, a larger share of equity will come from homeowners paying down the loan balance when compared to home value appreciation. In such markets, 15-year loans offer a relatively faster route to building equity.
The takeaway: 15-year mortgages are a great option for those wanting to build equity, regardless of how expensive or how fast growing a market is. However, in places with historically low appreciation, 15-year mortgages are a much better deal for building equity because it’s about the only way to do so though paying of the loan balance. On the other hand, in areas with historically high price appreciation that also happen to be expensive, households need to consider the tradeoffs between the borrowing power of 30-year mortgages, expected equity from home price appreciation, and whether or not they will use equity from their existing home as a down payment on their next one.
abstract from Trulia Money Jan 11 2016

Need help in Buying or selling a home? 
Contact me
Asifa Zia
Licensed in VA
Keller Williams Realty Manassas VA
540-729-3470
aszia09@gmail.com
www.buyandsellnorthvirginia.com


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