When you are searching for a home loan, you have many options. You can choose a fixed-rate loan or an adjustable-rate mortgage. You can go with a conventional loan, or use an FHA loan.
One of the most important decisions you’ll have to make is the time period for your loan. In this case, the two most common are 15-year mortgages and 30-year mortgages. Each one has its own advantages, and understanding the difference will make you a better borrower.
(There are other timeframes available, such as 40-year mortgages, but 30- and 15-year loans remain the most common.)
15-Year vs 30-Year Mortgage: Which One is Right for You?
The Benefits of a 15-Year Mortgage
Pay Off the Mortgage Faster
The main benefit of the 15-year mortgage is that you will pay off the mortgage much faster. (15 years faster to be exact.) Once the 15 years are over, assuming you still live in the home and have made all the payments, you will have a completely paid-for property, freeing up your finances for numerous other expenses.
Build Equity Sooner
A 15-year mortgage also allows you to build equity. This is, essentially, the same concept, but in this case you’ll have the ability to use financing against your home, such as home-equity lines of credit. If you are in a situation when you need to use cash-out financing, you’ll reach the equity requirements faster.
Less Chance of Negative Equity
Negative equity, which means you owe more money than your home is worth, is less likely with a 15-year mortgage. Even if you do end up owning more, the payments on a 15-year mortgage will erase the negative equity faster.
Lower Interest Rates Often Available
The interest rate on your mortgage can make a profound difference on the overall payments, as well as the total amount you pay. With a 15-year mortgage, which generally has less risk than a 30-year, you will be rewarded with a slightly lower interest rate. This will make your payments slightly lower, and will reduce the total amount you pay to borrow money for the purchase.
Less Total Interest
Even if the interest rates were equal, you will pay far less interest in total if you choose a 15-year mortgage. Although the monthly payments will be higher (more on that below), in the end you could pay hundreds of thousands less in total interest because you only make payments for 15 years years, not 30.
The Downside of a 15-Year Mortgage
Higher Monthly Payments
Above all, the biggest reason people avoid a 15-year mortgage is the higher payments. Using our mortgage calculator, we can see the difference between the two. Suppose we have a $500,000 purchase; for simplicity, we will leave the downpayment at zero and the interest rate at 4.25%. At 30 years, the total principal and interest payment is $2,460. But if we reduce the payment to 15 years, the payment goes to $3,761. That’s a difference of $1,301 every month.
May Limit Your Overall Housing Choices
Because the monthly payment will be higher, you may be limited in how much house you can afford. People who choose 15-year mortgages often have to choose smaller, more affordable homes because the higher payments restrict their options. Choosing a 15-year mortgage could possibly reduce your purchasing options by hundreds of thousands of dollars.
The Benefits of a 30-Year Mortgage
Lower Monthly Payments
There really is one supreme reason why people choose a 30-year mortgage: the affordable payments. As we described above, the monthly-payment difference between a 15-year mortgage vs a 30-year mortgage can reach into the thousands of dollars. For good reason, many people are interested in the lower monthly bill of a 30-year mortgage.
More House May be Available
Because the payments are lower, you may be able to afford a larger, more expensive, more luxurious home if you go with a 30-year mortgage. As the average home price continues to rise, especially in high-demand areas, you will likely see 30-year mortgages become more and more popular.
The Downside of a 30-Year Mortgage
In Debt for a Longer Period
After 15 years, the homeowner who choses a 15-year mortgage will no longer have a home-loan payment. The owner of a home with a 30-year mortgage, however, will only be half way through their payments. So while you may be paying less, you’ll be paying for twice as long.
Equity Comes Slower
With a 30-year mortgage, the equity (percentage you own) on your home will build much slower. So if you want to use a line of credit on your house or do a cash-out refinancing, you may not have reached the required equity levels as quickly.
Higher Interest Rates
Because the repayment period is twice as long, there is actually a higher chance of default on 30-year loans. Because of this (slightly) increased risk, you will pay a (slightly) higher interest rate. The difference may be small, but it can add up over a long period.
More Interest Will Be Paid in Total
In the end, a 30-year mortgage is more expensive than a 15-year mortgage. Just look at the provided example we used above. ($500,000 loan, 4.25% interest.) The 15-year mortgage had a higher total payment of $3,761. At 180 total payments, this means you paid a total of $676,980 when the mortgage is completely paid off. The 30-year mortgage had a smaller monthly payment of $2,461, but you make 360 monthly payments. This results in a total of $885,960.
This is just a single example (on a large loan), but you’ll be paying over $208,000 more in total payments if you choose the 30-year mortgage.
(There are some that recommend a low-payment 30-year mortgage and investing the difference, but in this case we just talking about the total-cost difference.)
Get Trustworthy Advice on a 15-Year vs 30-Year Mortgage
If you need more information on a 15-year vs 30-year mortgage, contact our helpful staff today. We’ll explain the benefits of each type so you can make a confident decision.
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