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Best Mortgage Deal? Try loans for 15 years

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POSTED August 9, 2013 6:23 p.m.

Now that a 30-year fixed rate mortgage has jumped to 4.4 percent hat’s the best mortgage deal around?

It’s a deal that likely won’t lower your mortgage payment, but will save you a fortune in interest over the life of your loan. It’s time to take another look at the benefits of the 15-year mortgage.

The interest rate spread between the two is at its widest level in years. While you’ll pay 4.5 percent for a fixed rate for 30 years, you still can get a 15-year mortgage loan for only 3.625 percent, each assuming 20 percent down payment. That difference reflects banks’ and investors’ fear of lending long term at today’s low rates, given the potential for inflation over a 30-year period.

But the risk of inflation is sharply diminished over a 15-year period. And that’s why — if you hurry — you can still get a much lower rate by committing to pay off your mortgage in just 15 years.

The good news with the 15-year mortgage is the lower rate. The seemingly bad news is the higher monthly payment. (But read on, because I’ll show you how much money you save over the long run.)

The monthly payment (principal and interest) on a $100,000 mortgage loan for 30 years at 4.5 percent is $506.

The monthly payment (principal and interest) on the same $100,000 loan, but for only 15 years, is $721.

The difference of more than $200 a month may put you off — unless you’re refinancing from a much higher rate loan.

But the monthly payment is only half of the story! Wait till you see how much interest you save by paying off your loan sooner.

Total interest paid out over the life of the 30-year loan amounts to $82,406.

But total interest paid on the 15 year loan amounts to only $29,785.

It’s a whopping difference! And think of it this way. All those mortgage payments you are NOT making during years 15 through 30 can go directly into savings for your retirement!

Plus, even if you plan on selling within five years, the 15-year is a good deal. The 15-year deal will pay down your mortgage balance by an extra 18.7 percent — for more cash in hand when you sell! It’s a form of “forced saving” — or, more accurately, forced equity creation.

While I recognize that many people are just scraping by on their mortgage payments, trying to get the lowest payment so they can afford life’s necessities, you may be one of those who can take a longer-term outlook. Especially if you’re refinancing and have already paid into your mortgage for several years, you’ll want to think twice about extending the term of your payments.

We’re always complaining about the banks making “too much money” off of consumers. Here’s one way to beat them at their own game. This unusually wide discrepancy between shorter-term and longer-term mortgages reflects a certain “dislocation” in the mortgage market, the current fears of Fed tightening and the longer term concerns about the return of inflation.

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