15 vs 30 Year Mortgage – Which Of Them is Better?
The main thing to ask yourself is whether or not you should get a 15-year mortgage or a 30-year mortgage. This section consists of the advantages and disadvantages of each so you can make a clear decision.
Looking for a new home is really exciting. You get to explore many areas to see what’s the best fit for you. Are you looking for a mortgage? This is the part that’s not as fun.
Even though it can be a daunting task, it’s necessary to do if you want the best deal on a mortgage. You’ll have plenty of options to choose from as you are shopping around. Here are some of the first steps: choose your lender, decide on your down payment, and choose if you're going to buy points or not. In addition to, the biggest decision you're going to make deciding the length of your mortgage term.
The mortgage term is how long you’re going to make monthly payments apart from making extra payments. Even though lenders offer various loan terms, the most common are the 15 and 30-year loan terms.
Some people (or those who’s interested in refinancing) look at the interest rate of a 15-year loan and think that’s the better option. I mean, who wouldn’t want to pay their loan in 15 years or less?
Overall, when people see that big number they have to pay, they say, “Ah, this may not be a good idea.”
Determining which mortgage term is right for you can be a challenge.
With a shorter 15 year mortgage, you will pay significantly less interest than a 30-year mortgage – but only if you can afford the higher monthly payment. Use this calculator for a comparison of a 15 vs. 30-year mortgage.
The Difference Between 15 to 30 Year Mortgage
The main difference between these two loan terms is how many payments you make and the amount of interest. A 15-year term gives you a high monthly payment with a low-interest rate. On the other hand, 30-year term gives you a low monthly payment, with a high-interest rate. As a result, you will pay more out of pocket due to high interest. In addition to, your payments are smaller.
Always remember to keep your budget in mind when deciding the length of your mortgage term. Weigh it against the overall costs. For instance, let's say you choose to borrow a $150,000 loan to help purchase your new home. You have the option to choose 15-year mortgage at 4% or a 30-year mortgage at 4.5%. Regarding the 15 year plan, your payment comes out to be around $1,110 per month, not including insurance and taxes. Overall, you’ll pay close to $50,000 in interest over the life of your loan.
If you choose the 30-year mortgage term, your payment would decrease to $760 per month. The less favorable part is that you’ll pay 2.5 times as much interest. On the other hand, you’ll have roughly $350 additional to pay off other debts, fund your retirement, or build emergency savings. Even though these are good things to do, the price of your home would drastically increase.
When is 30-Year Fixed-Rate a Good Idea?
The main reason why people choose a 30-year term is that they have low, monthly payments. It’s because you’ll be paying back the loan over a long period of time, even 30 years if you choose to do so.
Here’s a good example: Let's say you have a 30-year, fixed rate loan amount of $200,000 with a 4.75 percent interest rate. Your monthly payments come out to $1,043 per month that doesn’t include insurance or taxes.
On the flip side, let's say you have a 15-year mortgage and you borrow $200,000 with a 3.82 percent interest rate in the form of a 15-year fixed-rate loan. Your payment comes out to $1,461, not including insurance or taxes. Overall, you’ll have a higher payment amount to pay for 15 years instead of 30 years.
When is 15-Year Mortgage Makes Sense?
What a lot of people don’t realize is that a 15-year term saves them money in the long run, even though you pay more monthly.
It’s very surprising to see exactly how much, so let's continue the example above. If you purchase a home for $200,000, a mortgage at 30 years at today’s average interest rate is (4.75%) will cost a total of $375,588, which consist of the interest in principle, by the time the 30 years are up. On the contrary, a 15-year loan term at today’s interest rate of 3.82% will cost you only $263,052.
Overall, a mortgage that’s 15 years will save you $112,536 in interest payments which is a great reason to be more intentional with finances to give this option a try. Another thing to consider is your job situation. If you have a good job and know without a shadow of a doubt that you're not going to leave it, a 15-year mortgage plan is the better option for you.
Also, it’s important to consider if you surprisingly lose your job and not being able to make your payments. What would you do? You definitely wouldn’t qualify for a loan refinance. This is quite the pickle if this situation ever arise.
In addition to, another thing is to consider is the financial impact of having a higher mortgage. Paying down your mortgage at a fast rate may seem like a good thing on the surface. For instance, if you need to start an education fund for your kids, that may not be the best option.
30-Year Mortgage is More Flexible
Even though one of the greatest benefits of having a 15-year mortgage is paying off your home early, the greatest benefit of a 30-year term is flexibility. If you desire to, you do have the option to pay off the loan early, or you can invest instead. Having lower payments means that you don’t have to commit to paying so much to the lender. As a result, you’ll be in a position to make payments during financial hardships.
If you have the itch to spend more than save, a 15-year loan term is a better option because you have no choice but to put most of your income in your housing investment that appreciates in value.
On the other hand, if you know a 15-year loan term will take a majority of your money and you’re not able to meet other financial goals, a 30-year plan is the better option. You can’t easily sell a home in case of an emergency. Moreover, it won't give you a senior income, so you can neglect other financial duties just to pay off your mortgage quicker.
If you do have the money to pay a higher mortgage rate as well as meet your other needs, it doesn’t always mean a 15-year loan plan is the best option for you. If you have the discipline to use your extra money to pay more on your mortgage or invest, a 30-year term, in the long run, is the smarter choice.
Choose Your Balance
There are other options for you if you aren’t sure that you can commit to a 15-year mortgage term.
Remember, you can always take out a 30-year loan, but make payments as though you're on a 15-year term. Even though the interest is higher, you save more by paying the loan off early. In addition to, you have the option to not make an extra payment if other financial commitments arise.
Please note: Make sure that your loan agreement has no pre-payment penalties, and that your extra payments will go towards the principal and no the interest.
Always work with your lender or financial consultant ensure an effective game plan made specifically for you.