When applying for a new mortgage, one of the things you need to decide is the term of the loan. The most common mortgages are 15 and 30 year terms. While a 30 year mortgage is considered the gold standard in this country, many homebuyers are finding that a 15 year mortgage is more advantageous for their needs.
Read on to learn the differences between a 15 year and 30 year mortgage to help you decide which one is right for you.
Advantages Of A 15 Year Term
Obviously, the biggest advantage is that you’ll pay off the mortgage a lot quicker with a 15 year loan. If you plan on staying in your home and you don’t want to have to make mortgage payments for the rest of your life, the 15 year mortgage makes perfect sense.
With your mortgage paid off earlier you’ll be able to plan for other things like retirement, college for your children or other expenses.
Another advantage of a 15 year loan is the interest. You’ll save significant money on interest with a shorter term. It’s not just that you’ll only be paying interest for a shorter amount of time, the rate itself is actually lower. Rates for a 15 year mortgage are typically 1 full percentage point less than its’ 30 year counterpart.
Most lenders offer lower rates on 15 year loans which helps create additional savings. You can expect to pay less than half as much in interest on a 15 year loan versus a 30 year loan.
Finally, you’ll build equity (the difference between the home’s value and what you owe) faster on a shorter mortgage. As the difference increases, so does your equity. With a traditional 30 year loan, equity grows slowly. With a 15 year loan it grows more rapidly, giving you more options should you need to borrow against the equity in the future.
Advantages Of A 30 Year Term
The reason many lenders opt for a 30 year loan instead of a 15 year loan is that the payments are lower, significantly lower. Having a lower monthly mortgage payment can outweigh the many benefits of a shorter loan.
For many families, lower payments are a necessity to make home ownership a reality. In an uncertain economy, lower payments may also be preferred by those who aren’t 100 percent secure in their job.
With lower payments, you can increase your savings account or plan for retirement easier. It’s good for those that need to pay off credit card debt or who need to make improvements to their new home. Once your other debts are paid off or your savings is sufficient, you can always funnel the extra money towards paying down the principal on your mortgage instead, which will help pay off your mortgage in less than 30 years. Payment Difference
Many people ignore the 15 year option because they assume they either won’t qualify or can’t afford this type of loan. People often times believe that the payments of 15 year loan costs twice as much as a 30 year loan. But that’s simply not true.
It turns out that the monthly payment increases only moderately, making a 15 year loan an option for many buyers. Let me present an example to prove this point:
- A $300,000 30 year mortgage at 5% yields a payment of $1,610
- A $300,000 15 year mortgage at 4% yields a payment of $2,219
As you can see, the payment did not double, but rather only went up a bit over $600. And over the course of the entire loan, the 15 year mortgage will accrue $99k in interest whereas you’ll pay $279k in interest on the 30 year mortgage.
Do the math and take into consideration the lower rates afforded to shorter loans to determine which one is the best option for you.