Despite savings, 15-year loan isn't for everyone

STARTING OUT

December 05, 1993|By Dian Hymer

Should I apply for a 30- or 15-year loan?

A 30-year loan is one with a monthly payment schedule that pays the loan off completely over 30 years. A 15-year loan is paid off in 15 years. The monthly payments on a 30-year loan are lower than they are on a 15-year loan. Therefore, 30-year loans are easier to qualify for.

The primary advantage of a 15-loan is that the amount of interest paid during the term of the loan is much less than it is on a 30-year loan. In addition, 15-year home loans are offered at a lower interest rate than 30-year loans -- usually one-quarter percent to one-half percent less.

For example, the total interest paid on a $100,000 15-year fixed-rate loan at 6.125 percent is $53,112. On a 30-year fixed-rate loan at 6.5 percent, the interest paid will be $127,544.

A 15-year loan makes sense for someone who plans to retire within the next 10 to 20 years. It also makes sense for someone who's starting out with a low cash down payment but a large income who anticipates trading up. This is because a 15-year loan forces savings.

The equity buildup on a 15-year loan increases at a much faster pace than on a 30-year loan. It takes 24 1/2 years to pay down one-half of a fixed-rate loan that's amortized over 30 years. If you select a 15-year loan, make certain that the lender won't charge a prepayment penalty. This would diminish your savings.

Despite the savings, a 15-year home loan doesn't make sense for everyone. The monthly payments are $228 per month more on a 15-year fixed-rate loan than they are on a 30-year loan for each $100,000 financed at a 7.5 percent interest rate. Even if you can qualify at the higher monthly payment rate, you may feel more comfortable with a 30-year loan if your future income is uncertain or if it fluctuates widely.

An additional factor to consider is that a 15-year loan will usually provide less of a tax shelter. Mortgage interest payments are tax deductible; the higher the amount of interest paid, the larger the tax deduction. However, even when you take the tax savings into account, a 15-year loan will probably cost you less in the long run.

FIRST-TIME TIP: One advantage of a 30-year home loan is that it gives you more control over your finances: how much interest you ultimately pay, how much interest write-off and tax shelter you receive, and how much you pay monthly. Barring explicit restrictions by the lender, borrowers can increase the amount they pay monthly to the lender and thereby decrease the amount of interest paid over the term of the loan.

Once you've taken a 15-year loan, however, you're locked into making the higher monthly payments every month for the term of the loan, even when you may be cash-strapped.

THE CLOSING: An attractive feature of the 30-year loan is that it gives the borrower the flexibility to make higher monthly payments when it's affordable to do so, but it's not required.

Dian Hymer's column is syndicated through Inman New Features. Send questions and comments care of Inman News Features, 5335 College Ave., No. 25, Oakland, Calif., 94618.

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