Overview of mortgages for 15 and 30 years
Most borrowers opt for a 30 year fixed rate mortgage that gives them three decades to pay off their home.
You can also opt for a shorter loan term, such as a 15 year mortgage. This will allow you to pay off the debt on the loan twice as fast and will probably save tens of thousands of percent. But your monthly payments will increase significantly.
So which is the best choice for you: a mortgage for 15 or 30 years? It depends on several factors, including your financial situation, life goals, and what you can afford.
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Which is better – a mortgage loan for 15 or 30 years?
For many, the ideal product is a 30-year fixed rate mortgage. This is because, simply, it allows for more affordable monthly payments. The downside is that capital accumulation and loan repayment may take longer.
This is why some homeowners opt for a shorter loan term in the form of a 15-year mortgage.
“You can pay off the loan in half the time, you will pay much less interest over the life of the loan, and you will increase your equity much faster,” says Robert Johnson, Professor of Finance, Hayder College of Business, Creighton University.
However, this does not mean that a 15 year loan is always the best choice.
The main disadvantage of a 15 year mortgage is that the monthly payments are much higher as you have to pay the same amount in half the time. As a result, many homeowners simply cannot change their monthly payments.
You and your loan officer should compare the costs and potential savings of 15 and 30 year mortgages and then choose the one that best suits your financial situation.
Interest rates on mortgages for 15 and 30 years
Traditionally, a 15 year mortgage has a lower interest rate than a 30 year mortgage. This is because by agreeing to pay off debt faster, 15-year-old borrowers pose less risk to mortgage lenders.
“The difference in rates between 30-year and 15-year options is on average from 0.5% to 0.75%,” – said in a statement. Rob Heck, Head of Creation at Morty.
See how 15 and 30 year mortgage interest rates compare over the past six months based on data from a Freddie Mac survey:
Monthly mortgage payments for 15 year and 30 year loans
The mortgage payments on a 15-year loan are likely to be several hundred dollars more than for a 30-year.
“Imagine taking out a loan of $ 250,000 over 15 years at 2.50%,” says Tom Trott, Branch Manager of Embrace Home Loans. “Your monthly principal and interest payments will be $ 1,667.”
On the other hand, “A 30-year mortgage for the same loan amount at 2.99% will generate monthly payments of $ 1,053 – $ 614 less,” he explains.
Of course, the exact amount paid will depend on your credit rating, down payment, interest rate, and other factors. Therefore, it is worth comparing both types of loans before buying to see how your options break down.
Long term mortgage cost comparison
Finally, you will pay far less total interest expense on a 15-year loan than on a 30-year mortgage.
There are two reasons for this. First, because your interest rate is likely to be lower. Secondly, because you haven’t paid interest for so long.
Using Trott’s example above, you would have to pay about $ 129,000 in total interest on a 30-year loan compared to about $ 50,000 on a 15-year loan — thus saving over $ 78,900 on a shorter term.
you can use mortgage calculator to simulate your monthly payments and total interest on both types of loans to see a comparison.
Pros and cons of a 30 year mortgage
A 30 year mortgage can be a smart move for many.
“30-year mortgages are the most popular option for home buyers in the United States. Payments are stretched twice as long, resulting in lower monthly payments, ”says Heck.
“These lower payments make it easier to buy a home or buy a larger home while staying within your budget. It also allows home buyers to channel the savings into other household and living expenses, ”explains Heck.
The main disadvantage of a 30-year period is that you commit to make payments over a longer period. This means that you will pay much more interest over the life of the loan and your equity will grow much more slowly.
As a result, if you sell your home before the loan is paid off – especially during the first 5-10 years of owning the property – you will make less profit.
“Another downside is that because your payments are lower than a 15-year mortgage, you might reasonably think you can commit to buying a bigger home and incur more debt for a longer period,” Johnson warns. …
Finally, longer terms are usually accompanied by slightly higher interest rates. This contributes to the payment of higher interest rates over the life of your mortgage.
|30 year mortgage pros||30 year mortgage versus|
|Lower monthly payments||In general, more interest is paid over the term of the loan|
|Potentially Bigger Home Buying Budget||Interest rates are slightly higher than 15 years fixed rate mortgages|
|Increased cash flow for things like investment, retirement, renovations, etc.||Increases equity capital more slowly|
Pros and cons of a 15 year mortgage
There are pros and cons to choosing a 15 year mortgage loan.
“You will pay off your debt faster, given that the faster depreciation schedule, build up capital faster and are likely to get a lower interest rate. A 15-year mortgage is one of the best ways to reduce mortgage debt, and it can save home buyers thousands of dollars in interest paid, ”says Heck.
Trott explains that over the life of a 15-year loan, “approximately 17% of your total payments go to interest, compared to approximately 34% of your payment applied to interest on a 30-year loan.”
But the biggest disadvantage of a 15-year loan is that your minimum monthly mortgage payment will be significantly higher – probably by several hundred dollars.
Over the life of a 15-year loan, “approximately 17% of your total payments go to interest, compared to approximately 34% of your payments applied to interest on a 30-year loan.” –Tom Trott, Branch Manager, Embrace Home Loans
“Higher monthly payments on a 15-year mortgage could mean you can qualify for a cheaper loan and settle for a smaller home or skip the dream areas,” adds Heck.
“It can also cause borrowers to stretch their housing payments too much in the event of a contingency or life event that changes their monthly income,” he continues.
What’s more, purchasing a 15-year mortgage can leave you with less money to spend on other investments like a retirement plan or funding a child’s college fund.
“If your mortgage payments are as high as a percentage of your monthly income that you cannot adequately fund your retirement account or your child’s college education, then it may be wise to take a 30-year mortgage instead,” Johnson suggests.
Keep in mind that the extra money you pay each month with a 15-year loan could instead be used to invest in the stock market or retirement accounts, which could bring a higher average rate of return over those 15 years.
|15 year mortgage pros||15 year mortgage versus|
|Lower interest rates than 30 year fixed rate mortgages||Higher monthly payments|
|Lower total cost of interest over the life of the loan||Less cash left over for investment, emergency funds and other expenses|
|Faster build-up of equity capital||Potentially smaller home buying budget|
What loan term to choose?
The right mortgage term for you depends on your monthly budget as well as your age, income, savings and financial goals.
Jake Mayer, a senior mortgage banker at the American Bank of Missouri, says good candidates for a 15-year mortgage are those who:
- Can comfortably afford higher monthly payments;
- Want to pay for your home faster;
- Want to build capital faster;
- And have cash flow to support the debt burden and additional homeownership costs.
John lee, co-founder and CTO of Fig Loans, adds that “Seniors close to retirement may want to opt for 15-year mortgages and make aggressive payments to get their home paid or nearly paid off at retirement.”
However, Johnson cautions against choosing a 15-year mortgage “unless you have a strong financial position to fund other life goals such as retirement accounts and children’s education funds.
“If moving to a shorter mortgage will prevent you from financing these other life goals, then a 30-year mortgage is probably the best choice,” Johnson says.
Young people with a lot of work ahead of them are also likely to be wise to choose a 30-year mortgage, “especially if they are just starting their careers and receiving entry-level salaries,” adds Lee.
And the last thing to think about: you can always take out a 30-year mortgage and at any time either refinance it before the 15-year term, or make additional payments towards the principal balance (provided that your mortgage does not have any or prepayment penalties, which most do not).
If you stick to a disciplined and aggressive schedule of accelerated payments, you can probably pay off your 30-year loan in 15 years or less if you want to.
It is worth looking into mortgages for 15 and 30 years. Whether you are buying a home for the first time or refinancing a home, any type of loan can have its advantages and disadvantages.
Ask your loan officer to tell you about the monthly payments and the total cost of each type of loan, as well as short and long term savings. Then choose a suitable loan term for your personal finances.