When buying or refinancing a home, one of the first major decisions you have to make is whether you want a 15-year or 30-year mortgage. While both options offer a set monthly payment for many years, there are several distinctions between the two other than just how long it will take you to pay off your property. But which one is better for you? Let’s look at the benefits and drawbacks of each mortgage so you can choose which one works best for your budget and long-term financial goals.
What Are the Differences Between 15-Year And 30-Year Mortgages?
The length of each loan is the most significant distinction between a 15-year and a 30-year mortgage. A 15-year mortgage allows you to pay off the total amount you borrow to purchase your house in 15 years, whereas a 30-year mortgage allows you to pay off the same amount in double the time.
Fixed-rate loans are the most common type of mortgage. When you get a 15-year or 30-year mortgage, for example, you will lock in an interest rate at the time of application and keep that same interest rate for the duration of your loan. You will also usually have the same monthly payment throughout the whole term of your loan.
Pros Of A 15-Year Mortgage
Faster Payoff: You’ll be mortgage debt-free in half the time of a traditional, 30-year mortgage if you take out a 15-year loan.
Pay Less Interest: You will save interest money if you make fewer payments. This can be a difference of tens of thousands of dollars over the length of the loan, depending on your loan size.
Lower Interest Rate: Lenders typically demand lower interest rates on a 15-year mortgage than they do on a 30-year loan, resulting in additional savings over the lifespan of your loan.
More Equity, Faster: You will pay more of the principal over time with a 15-year loan, which means you’ll have equity in your home sooner that you can use if necessary.
Cons Of A 15-Year Mortgage
Smaller Loan Amount: If your ideal house is on the higher end of your affordability range, you might not be able to obtain a 15-year loan. A more expensive house means a more significant payment, so you may not qualify for as big a mortgage.
Higher Monthly Payment: Short-term loans are almost always higher priced than regular unsecured personal loans. With a shorter loan, you will probably pay considerably more each month. Your payment may be 40% greater than it would be on a 30-year mortgage, and even more in some cases.
Pros Of A 30-Year Mortgage
Lower Monthly Payment: When you take out a 30-year mortgage, your monthly payment will be far less than if you took out a 15-year mortgage.
Easier to Qualify: The lower monthly payment makes it easier for consumers to fulfill debt-to-income ratio criteria and get a loan.
More Room In Budget: A lower payment means you’ll have more money to spend on other things.
Cons Of A 30-Year Mortgage
More Interest Paid: You will pay way more interest over 30 years than on a 15-year mortgage.
Higher Interest Rates: Lenders consider a 30-year mortgage riskier and will charge higher rates.
Slower Equity: You’ll pay less in the long run if you take smaller initial payments, so it will take longer to build equity. It might also extend the time to pay for private mortgage insurance.
Should You Choose A 15 Or 30-Year Mortgage?
So, how do you decide? Take a look at your finances and see what options are available to you.
A 15-Year Loan Is Best If:
- You Can Comfortably Afford a Higher Monthly Mortgage Payment: On a 15-year loan, your monthly principal and interest payments will be dramatically higher. Only consider this option if you have extra cash in your budget and can still pay other bills, such as credit card debt.
- You Want To Build Equity More Quickly: You’ll pay less interest on a 15-year mortgage than on a 30-year mortgage since you’re paying more each month toward your principal. This allows you to build equity in your property at a faster rate. Additional equity enables you to get a cash-out refinance, home equity loan, or home equity line of credit for other financial objectives sooner because it frees up cash earlier. It also implies that you’ll be free of your mortgage much sooner.
- You’re Buying a House That’s Well Within Your Means: Obtaining a loan for 15 years or less is feasible if you take the 15-year option. This could be a better alternative if you know you can pay it off sooner.
- You Plan To Stay In Your Home Short Term: If you know you’ll have to sell relatively soon, a 15-year loan might help you develop more significant equity and earn more money when reselling. You’ll make an enormous profit once all the costs and commissions are deducted because you’ll pay more principal than interest.
A 30-Year Loan Is Best If:
- You Want a Lower Monthly Mortgage Payment: Your repayment term is longer with a 30-year loan. This spreads out your mortgage payments over a more significant period, making them more affordable.
- You Want More Room In Your Budget: A lower monthly mortgage payment gives you more wiggle room for budgeting and focusing on other financial goals, such as boosting your emergency fund or retirement savings.
- You Want the Option To Pay Off Your Mortgage Faster Without Being Tied Down: If you borrow a 15-year loan, you’re committing to a higher monthly mortgage payment for the entire loan term. However, a 30-year mortgage allows you to pay extra money toward your principal and shave time off your repayment term whenever you have the financial bandwidth to do so.
- You Want To Buy the Best House You Can Afford: You’ll likely qualify for a larger loan with a 30-year mortgage, which means you can buy a more expensive house.
There is no right or wrong answer when choosing a 15-year or a 30-year mortgage. It depends on your unique financial situation and what you’re looking for in a home loan. If you can afford the higher monthly payments of a 15-year mortgage and you’re confident that your income won’t fluctuate much over time, this may be the best option. On the other hand, if you want more flexibility and lower monthly payments, then a 30-year mortgage may be the way to go. Ultimately, it’s up to you to decide which one makes the most sense for your circumstances.
Have you ever considered a 15-year or a 30-year mortgage? Contact us for a free consultation.