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15 or 30 years mortgage: Which is a better choice?

Over the years, I have worked with many clients who like to ask me this age-old question “Should I take a 15-year mortgage or a 30 year-mortgage? Which is a better choice?” The truth is, the answer to this question is not as direct as it seems. There are pros and cons to both options! And today, in this article, we will be exploring the actual differences between a 15-year mortgage and a 30-year mortgage. Equipped with examples and case studies, this article will help you to make an informed decision to see which option is better for you.

Difference # 1: Amount of Time & Payment Per Month

The first—and most obvious—difference between the two mortgage options is the amount of time that you will need to pay off the mortgage. With a 15-year mortgage, you will have less time to pay off your mortgage. What this essentially means is that you will be making half as many payments as you would be as compared to if you took a 30-year mortgage.

Consequently, to pay off the mortgage in a shorter time, each payment that you make will have to be higher than if you took a 30-year mortgage. Comparatively, if you took a 30-year mortgage, you will be able to spread the same amount over twice as many payments. Each payment will therefore be of a lower value.

Let us take a look at this example so that you are able to visualize things better:

Say you buy a property for $1,000,000 with a down payment of $250,000. The total cost of the house would include the down payment, the Principal Sum, as well as the interest that has been accrued.

For a 15-year mortgage, you would have to pay $6,207.43 per month for 15 years.

For a 30-year mortgage, you would have to pay $3,451.20 per month for 30 years—$2,756.23 less.

In this way, for a 30-year mortgage, you will be enjoying a lower monthly payment, the benefits of which you should not ignore, as we will see later!

Difference # 2: Interest Accrued

MAS Interest Rate and Property
Singapore Housing Interest Rate
 

The second difference that you will notice when it comes to deciding between a 15-year mortgage and a 30-year mortgage is the amount of interest that you will have to pay off along with your mortgage.

Taking the previous example of the $1,00,000 home, here is the math:

For a 15-year mortgage, you would have to pay off $117,337.50 in interest.

For a 30-year mortgage, you would have to pay off $242,432.75 in interest—$125,095 more.

Basically, the longer you borrow the more interest you will pay. This is because the amount that you have to pay your interest on stays higher for a longer time in a 30-year mortgage. In addition, 15-year loans typically have lower interest rates than 30-year loans.

In the example above, you would have to pay $125,095 more in interest when you choose a 30-year mortgage over a 15-year one. Therefore, if looking for the option with the lowest interest rate is the one and only priority for you, you are better off choosing a 15-year mortgage.

Difference # 3: Cash Flow, the Stock Market, and The Power of Leverage

Stocks vs Properties

As seen from the example above, a 15-year mortgage can help you to save on interest in the long-term. That said, however, you will have to make do with higher monthly payments with the shorter mortgage option. This would mean that your cash flow would be weaker, something that could be particularly concerning for those of you who are building your emergency fund or paying off debts.

Furthermore, with a 30-year mortgage, you could leverage on the power of its greater cash flow to help you grow your wealth. Confused as to how? Fret not!

Let’s say you decide to choose the 30-year mortgage option for your million-dollar home. We have already established above that this would mean that each month, you will pay $2,756.23 less than if you were to take a 15-year mortgage. At the same time, you would be paying $125,095 more in interest.

Your investment savvy friend then encourages you to invest the $2756.23 monthly difference into an index fund that tracks the S&P 500. Conservatively, this should earn you about 7% return of investment annually, based on historical data and figures.

If you remain disciplined enough to put the monthly difference into the index fund, you would make $231,490 in just 15-years. If we take into account the full 30 years, it would mean even more earnings.

On the other hand, if you were deterred by the higher interest rates of a 30-year mortgage and decided to choose the 15-year mortgage, you would have saved $125,090.25, as mentioned above.

So, what does this all mean? If you had chosen the 15-year mortgage, you would have paid off the house in 15 years. But because your cash flow would be tight, you would not have had enough money to make monthly investments. Your opportunity cost would then be $106,400—an amount that you could have potentially earned!

Should You Get a 15-year or a 30-year Mortgage?

We now come back to the age-old question. After all that we have said, should you get a 15-year or a 30-year mortgage? Which is better? As prefaced at the beginning of the article, there is no right or wrong answer to this question. But if you only take home one thing from this article, this is it—it all boils down to financial discipline.  

Put simply, you should only opt for a 30-year mortgage if you are financially disciplined enough to invest the difference that you keep every month. The benefits of a 30-year mortgage can only be reaped if you have the discipline to systematically invest the equivalent of those monthly differentials!

If you lack financial discipline, are too lazy to invest, or find it hard to invest monthly for whatever reason, a 15-year mortgage may be your best bet. This is because a 15-year mortgage would “force” you to save the amount of money!  

The Bottom-line

The decision to take a 15-year mortgage or a 30-year mortgage is one that can impact your finances for the next few decades of your life.

If you know you are financially disciplined and know how to use the savings to put in some investment portfolio over the long run, you should take a longer mortgage. However, if you know that this money will be used as expenditure or you do not know how to invest, it will be better off taking a shorter mortgage and repay it up as fast as possible, hence saving more on the interest.

Hence, it is not a decision that you should take lightly! Keeping in mind your financial situation, spending habits, and financial goals, be sure to take the time to crunch the numbers before you jump to a decision! 

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