A 15 year mortgage means lower interest rates but a higher mortgage payments.
A 30 year mortgage means higher rates but a lower mortgage payment.
So which one is best for you?
Well it depends on several factors. We will compare 15 vs 30 year fixed-rate mortgage loans and go over the pros and cons to help you decide which one is best for you.
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The 30 year fixed-rate mortgage
The 15-year and 30-year fixed-rate mortgages are the two most popular loan types for consumers. These loans come with a degree of certainty. Their interest rates are fixed over their lifetimes.
This means that your mortgage payment won’t change dramatically each month. It could still fluctuate if your homeowners insurance or property taxes change. But the fixed interest rate means that these changes shouldn’t be major.
Once you’ve decided on one of these fixed-rate loans, it’s time to decide which one works best for you. Fortunately, there are plenty of differences between 15 vs 30 year mortgage loans.
Pros of the 30-year mortgage
- Lower monthly payments
- More cash for savings/retirement
- Will qualify for a higher loan amount
Cons of the 30-year mortgage
- Higher mortgage interest rate
- Pay more interest over the life of the loan
- Home equity builds up slowly
Why choose a 30 year fixed-rate?
Many buyers choose the 30-year fixed-rate mortgage for one big reason: It comes with the lowest monthly payment. That’s because you’ll be paying back the loan over a long period of time, 30 years if you hold the loan until its end point.
Here’s an example: Say you take out a 30-year fixed-rate loan of $200,000 at an interest rate of 4.10 percent. Your monthly payment, not including taxes and insurance, will come out to about $966 a month. That’s a relatively affordable payment.
Now, say you’re considering a 15 year mortgage. If you borrow that same $200,000 with an interest rate of 3.20 percent in the form of a 15-year fixed-rate loan.
Your monthly payment, again not including taxes or insurance, would jump to about $1,400, a more daunting figure. However, you will be making that higher monthly payment for just 15 years, compared to 30 years.
15 Year Fixed-Rate Mortgage
Because the payments on a 30-year loan are stretched out over such a long time, you’ll end up paying a lot of interest if you hold such a loan until its final pay-off date.
Say you take out that $200,000 mortgage as a 30-year fixed-rate loan with an interest rate of 4.13 percent. If you take the full 30 years to pay off that loan, you’ll pay more than $140,000 in interest.
If you instead take out a $200,000 15-year fixed-rate loan with an interest rate of 3.20 percent, you’ll pay just more than $52,000 in interest if you take the full 15 years to pay off the loan.
The benefit of a 15-year term mortgage, then, is that you’ll spend a lot less in interest while paying off your mortgage at a faster clip.
Your debt-to-income ratio will be higher with a 15 year mortgage because the monthly mortgage payment will be higher. So you won’t qualify for as large of a loan.
Pros of a 15-year mortgage
- Pay off your mortgage faster
- Lower interest rate
- Pay less interest over the life of the loan
- Build equity quicker
Cons of a 15-year mortgage
- Higher monthly payment
- Less extra cash each month
- Will qualify for a lower loan amount
When a 30-year mortgage makes more sense
If monthly cash flow is your biggest concern, or you earn commissions and your income varies the 30-year fixed-rate loan might be the best choice. Because this loan type comes with the lowest monthly payment, it will also leave you with more money in your budget each month.
The 30-year loan is a good way to get into a nice house with an affordable monthly payment. You can always pay down the principle balance faster by paying extra each month. However, you are not locked into that higher mortgage payment, you can choose to pay more but are only required to pay your lower monthly payment.
When a 15-year mortgage makes more sense?
If you can afford the payment that comes with a shorter term loan such as a 15 year mortgage, the 30-year mortgage might not be a wise financial move.
15 year fixed-rates have mortgage rates that are as much as 1% lower than a 30 year fixed rate loan. No one enjoys paying interest on a mortgage. With a 15-year loan you will save tens of thousands of dollars. You’ll be paying far less in total to borrow your mortgage money.
How long will you live in the home?
You should also consider how long you’ll be living in your home. This can make a big difference in whether a 30-year or 15-year mortgage is the best decision.
If you plan on living in your home for a short period of time — say eight years or less — then a 30-year loan might make the most sense. You’ll benefit from the lower monthly payments, and you won’t have to pay as much interest because you’ll be selling your home long before your loan’s pay-off date.
If, though, you want to live in your home for 15, 20 or more years, the 15-year loan might make more financial sense. However, if you plan on living in your home for the long-term, you might as well shave tens of thousands of dollars off the amount of interest you’ll pay while living there.
An experienced Loan Officer can help
The best way to resolve the 15 vs 30 year mortgage question is to meet with a mortgage lender. This financial professional can study your finances, determine your housing goals and help you calculate which loan type makes the most sense for you.
Alternative options for 15 year mortgages
The major drawback of the 15-yr mortgage loan is that you’re locked into a higher payment. If for any reason money becomes tight, the higher mortgage payment can be a real burden.
However, you could opt for a 30 year fixed rate mortgage and pay an additional amount each month to pay off the loan in 15 years while not being locked into that higher payment. On a $160,000 loan the 30-yr mortgage payment would be roughly $850 per month.
By paying an additional $415 each month you will pay off your mortgage in just 15 years. This is a great option, if you can afford the extra $415 per month then you pay it, if something happens and you can’t afford it you pay just $850. This is something to consider if you’re thinking about doing a 15 year loan.
An adjustable-rate mortgage (ARM) has a low initial interest rate that expires after a certain amount of time. The mortgage rate will increase annually afterwards.
For example: A 5/1 ARM is one of the most popular adjustable rate terms. The first 5 years of the mortgage will have a low rate, even lower than a 15 year fixed-rate mortgage. After the initial 5 years the rate increases annually and can go up as high as 13%.
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