“With 15 year fixed rates meandering in the low 3% range, many borrowers are choosing 15 year fixed rate loans. However, is this really the right move???
Let’s compare a 30 year fixed rate payment with a 15 year fixed rate payment on a $200,000 loan amount. The payment on a 15 year fixed rate, at 3%, would be around $1,381 per month as compared to a 30 year fixed rate at 3.875% which would yield a payment of around $940 per month. The difference in payments is about $440 per month!!! I understand that after taxes you will save over $60,000 in interest by choosing the 15 year fixed rate however, is there a better use of the $440 per month savings utilizing the 30 year fixed rate???
Let’s start with several ideas. You could take the additional $440 per month and add it to your retirement account each month which would grow to over $78,000 in 10 years assuming a modest 6% return. Over 20 years this money would grow to an amount over $255,000. You could also use the $440 per savings for a college fund. In just 5 years you would have put away over $26,000 plus the return on your investment. The savings could also be used to retire credit card debt are at rates well above 13% and provide no tax deductions. However, you could simply put the money away in savings and have it available for a “rainy” day. Life is not predictable and certainly not in our current economic times. The bottom line is that is much easier to make a $940 per month payment as opposed to $1381 per month payment if there is a change in your employment or other unexpected expenditures arise.
I am not saying that a 15 year fixed rate is not good for some clients but I believe I have shown that there are other options for your $$$!!!
Have a Great President’s Weekend!!”
by: DC Aiken, VP
Community & Southern Bank