Ask Money

A 30 vs. 15 year mortgage

Chris Farrell Dec 1, 2010

Question: Our mortgage company just sent us an offer to refinance our current 5% 30-year fixed rate mortgage with no fees and minimal paperwork with either another 30-year at 4.25% or a 15-year at 3.875%. We currently make extra payments of $350 per month and are 5 years into our mortgage. After running some numbers on your mortgage calculator it doesn’t seem like it would make much of a difference on the total interest paid over the life of both mortgages if we accept either of these offers and continue to prepay the same amount we do now + or – the difference in monthly payments. Lydia, Cary, NC

Answer: The no-fee refinance offer you received is attractive. The rate reduction is part of the federal government’s stimulus package. I wrote about this in more detail in a post earlier this year.

I’m glad you ran the numbers. My take is that I usually favor the 30-year fixed-rate mortgage, especially for someone as disciplined like you. After all, you’re paying an extra $350 a month. The advantage of the 30 year is that the required monthly payment is less than with the 15 year. So, if circumstances changed and you needed to free up some cash you could always go back to the lower minimum monthly payment on the 30 year mortgage.

In other words, in your case the only advantage of the 30 year is that it offers an extra margin of safety

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