What color is it painted?  Is it in a good neighborhood?  What’s the school district?  What’s the appraisal?  How are the appliances?  How much acreage is it?  What’s your down payment?  How many bedrooms?  What is the interest rate on the loan?

These are all great questions to ask, but they lack one GIGANTIC question that every prospective homeowner should ask:

What is my mortgage going to cost me?

Let’s take a reasonable example to see how this works best: a $200,000 home, with 10% down ($20,000), meaning you’ll take out a $180,000 loan.

You can take out a 15-year loan or a 30-year loan.  The 15-year has a significantly higher payment, but the 30-year means you’ll be in debt longer.  Which do you choose?

If you were to pay off the hypothetical loans at their scheduled rates, you will pay $167,861 in interest for the 30 year loan, and $76,217 in interest for the 15-year loan.  That’s a difference of $91,644!

You’re going to pay over $90,000 to have the privilege of lower payments and stretching out that loan over 30 years instead of fifteen!  I hope you like that mortgage!  That’s why I never recommend people get into a 30-year loan.  You’re going to pay through the nose, and you won’t build equity as fast.

I can’t address all the questions and objections this assertion might raise in this post, but here’s a big one: What if you sell before the loan is paid off?  That might not be your dream/forever home, so you might only own it five years.  The question then, is,  “How much equity will you have built in five years?”  Let’s find out.

Including the $20,000 you put down, you will have built up $34,709 in equity with the 30-year loan (not including increased property value that can come with time).  But with a 15-year loan, your equity built is $65,798!  With a 15-year loan, you’ve paid yourself over $30,000 in 5 years instead of paying that money to the bank in interest!

Any way you look at it, the 15-year loan is the way to go.  Start slower, buy less home if you have to, and do the thing that will work for you over the long run.

$180,000 30-Year mortgage at 5%:

Interest paid over life of loan: $167,861
Total cost of home*: $347,861 (cost of loan) + $20,000 (down payment) = $367,861
Equity after 5 years (not including appreciation): $34,709
Appreciation not included because it would be equal for both hypothetical loans and properties – only difference comes from loan interest.

$180,000 15-year mortgage at 5%:

Interest Paid over life of loan: $76,217
Total cost of home*: $256,217 (cost of loan) + $20,000 (down payment) = $276,217
Equity after 5 years (not including appreciation): $65,798
Appreciation not included because it would be equal for both hypothetical loans and properties – only difference comes from loan interest.

*NOTE – Total cost of home calculation does not include taxes, insurance, HOA dues, upkeep, etc.; just the cost to purchase the home.