One of the first important decisions you’ll need to make when buying or refinancing a property is whether you prefer a 15-year or 30-year mortgage. While both choices offer a set monthly amount over a lengthy period of time, there are more distinctions between the two than simply how long it would take you to repay your mortgage.
Which one, though, is best for you? Let’s examine the benefits and drawbacks of each mortgage term so you can choose the one that best suits your financial situation and budget.
If you need a reliable mortgage broker to discuss your various mortgage timelines and options, contact the Mortgage Shop today.
Differences Between 15 vs 30-Year Mortgage
The duration of each loan—15 years vs. 30 years—is the main distinction between them. A 30-year mortgage offers you twice as long to pay back the same amount, compared to a 15-year mortgage.
Both 15-year and 30-year loans are often designed as fixed-rate mortgages, which means you’ll lock in a rate of interest at the start of the loan and retain it for the duration of the loan. Throughout the whole mortgage term, your monthly payment will normally remain constant.
|
15-year Fixed Mortgage |
30-year Fixed Mortgage |
|
Lower interest rates |
Higher interest rates |
|
Needs to be paid in 15 year |
Needs to be paid in 30 years |
| Higher monthly payments |
Lower monthly payments |
The interest rates on 15-year mortgages are often lower than those on 30-year mortgages, so a 30-year mortgage will cost you more overall because you’ll be repaying over a longer time period.
15-Year Fixed-Rate Mortgage
It’s a straightforward idea: 15-year mortgages are repaid in half the period of the conventional 30-year mortgage, which is considered to be the “holy grail” of banking. While 30-year mortgages remain popular, some homeowners are choosing a 15-year payment time.
Pros of a 15-Year Mortgage
Here are some of the benefits of a 15-year mortgage plan.
Interest rates are lower.
Lenders are constantly calculating risks, and the danger of a borrower defaulting on a mortgage over a period of 30 years is higher than over 15. That is one of the reasons why a 30-year loan’s interest rate is greater than that of a 15-year loan. Although the difference is small—anywhere between a quarter and a full percentage point—on a long-term mortgage, the lower rate of interest can have a big impact on how much you ultimately pay back.
Reduced interest costs.
Mortgage interest is calculated based on a loan’s outstanding balance. As a result, you will pay less in interest each month the quicker you pay off all the principles of a mortgage.
Lower interest rate overall.
Because a 15-year mortgage may be covered in half the time, you will save money overall because you won’t be paying interest for 15 years throughout that period.
A 15-year mortgage has far higher monthly payments than a 30-year mortgage, and the larger monthly repayments on the shorter time period may be severe if interest rates increase. However, historically low rates of interest have increased the popularity of 15-year mortgages.
Low 15-year mortgage rates, which in January 2020 ranged from 3.28% to 3.44% on average, save money and typically allow purchasers who want to pay down the principal rapidly to do so without going bankrupt.
Considering that every case is unique and the advantages of a 15-year mortgage need to be balanced against other aspects, buyers interested in obtaining the greatest rate of interest on a mortgage should definitely consider the 15-year option.
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Pros |
Cons |
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Lower Interest Rates |
Higher monthly payments |
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Less Total Interest |
Less Affordable |
| Higher Home Equity |
Less Savings |
Cons of 15-Year Mortgage
Some of the disadvantages of a 15-year mortgage include the below.
The increased monthly cost could be beyond many people’s price range. For instance, a 15-year loan for $200,000 would cost around $1,411 per month in January 2020, excluding taxes and insurance. For a 30-year, $200,000 mortgage (without insurance and taxes) your monthly payment would be closer to $898. That represents a $513 monthly difference, which for some, is a critical contrast.
The flexibility of a 30-year mortgage is greater than a 15-year mortgage. You can pay twice as much each month, with the extra amount going toward lowering the principal, to treat it as if it was a 15-year mortgage. However, you may go back to the cheaper 30-year payment if cash is tight.
You might be able to afford a larger house thanks to the reduced monthly installments of a 30-year mortgage.
If you need a reliable mortgage broker to chat about your unique situation and your financing options, contact the Mortgage Shop today. We can walk you through the range of opportunities available so you can choose a mortgage that suits you.
30-Year Fixed-Rate Mortgage
“Is a 30-year mortgage bad?” is a common question for those looking for mortgage options. The answer is, no. In fact, it’s the most common mortgage choice for U.S. homeowners for a variety of reasons. However, one of its key benefits is that 30-year mortgages feature lower monthly installments since the payments are spread out over a timeframe that is two times longer than a 15-year mortgage. With lower payments, you may purchase a smaller or larger property while still staying within your means.
Pros of a 30-Year Mortgage
Lower payment:
By delaying loan repayment for a long time, a 30-year term makes monthly payments more manageable.
Flexibility:
You can make extra payments or increase your monthly payment to pay off the loan sooner, but you can always switch to a lesser payment when necessary.
Predictability:
It’s reassuring to know that, regardless of how bad the economy goes or how high-interest rates rise, your mortgage payment will remain the same each month. Also, lower mortgage payments may allow you to purchase a property that is more expensive.
Greater tax deduction:
As of now, many homebuyers are permitted to deduct their loan interest from their taxes. In the early years of a mortgage, the majority of your loan repayments go toward paying down interest. Deductions can result in a sizable tax benefit.
Allows you to fund other objectives
Lower monthly mortgage payments allow for greater personal financial flexibility, leaving more money available for other objectives.
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Pros |
Cons |
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Lower Monthly Payments |
Higher interest paid in total |
|
Flexibility |
Slow equity growth |
| Greater Tax Deduction |
Higher rates |
Cons of a 30-Year Mortgage
Higher rates:
Since the danger of non-repayment to lenders is stretched over a longer period of time, they impose higher interest rates.
More interest is paid:
Compared to a shorter loan, paying the interest for thirty years equates to a significantly larger total cost.
Slow equity growth:
It takes more time to increase your home’s equity share.
Overborrowing risk:
Some people may be tempted to purchase a larger, better-quality property that is more difficult to buy in order to qualify for a larger mortgage. Keep in mind to leave room for life’s unforeseen events.
Which One Should You Choose?
Think about the future when deciding which mortgage is best for you, especially what will occur once your working career is through and, if you have children, what your plans are for their future as well.
If you have many working years left in your future, consider what type of income growth you expect over time and if you will get an inheritance or any other windfall. Retirement is another aspect, regardless of age. The choices regarding the term of your mortgage grow increasingly detailed as you get closer to retirement age.
If you’re trying to decide between a 15-year and 30-year mortgage, take these things into account.
College Savings.
Some people desire to finish paying off their mortgage before sending their kids to college. This typically removes a significant debt from your budget at the same time that you incur a new one. Keep in mind, too, that there are other strategies, such as tax-free 529 savings programs, for saving for college.
With a 30-year mortgage, smaller monthly payments can provide you with extra money to put aside in a college fund that will grow and generate interest over time.
Future Earnings
Do you work in a field that sees significant annual salary growth, or is it modest? Do you intend to change jobs often in order to boost your income? How much would you be able to save while working?
A 15-year mortgage can be the ideal choice if you are convinced that your income will increase faster than your spending since as time goes on, your monthly repayments will represent a lower proportion of your income.
Possibility of Inheritance
If you predict a large inheritance or other benefits before the loan is paid off, a 15-year mortgage may be advantageous, but a 30-year mortgage may also work well. Think about the number and timing of your expectations.
With the knowledge that you’ll eventually get an inheritance to put toward a retirement account, you could decide to take out a 15-year mortgage.
The 30-year mortgage plan could save you cash in the short term, and you could use the inherited funds to pay down most or all of the remaining sum.
Unpredictability.
A 30-year mortgage makes sense if you’re not anticipating a windfall and are unsure as to how much your earnings could increase over time. Even if you’re sure a 15-year loan is a wise choice for you right now, things might change. Even the best-kept budget can suffer from the unforeseen events life throws at us, like job loss, disability, house fires, and family emergencies.
Large payments that first looked manageable may thereafter become a hardship. Ensure you have a reserve fund of some kind for unanticipated expenses so you can make your mortgage payments on time. You might consider a 30-year mortgage if making the higher monthly payments and keeping an emergency reserve are out of your price range. Furthermore, you can apply for a 30-year mortgage and then make additional payments to finish the loan sooner.
Planning for Retirement.
Building retirement accounts is more crucial than paying off your mortgage throughout your working years. Additionally, saving for retirement is a long-term endeavor, much like repaying a mortgage.
Your whole financial portfolio may become home equity after paying off a 15-year mortgage. You may borrow against a certain investment with either a home equity loan or a line of credit, but you’ll be required to pay interest on the amount borrowed. Additionally, taking money out of a retirement account is simpler than taking money out of your home’s equity.
By choosing a 30-year mortgage, you might be able to contribute more funds to an IRA or 401(k), which will grow tax-free until you can withdraw from them without incurring penalties.
It’s worth considering how close you are to retirement. Depending on your situation, you might be able to pay off your loan before retiring with a 30 or 15-year mortgage. Some retirees use the loan interest tax deduction to their advantage, which is no longer accessible once the loan is paid off.
As you get closer to retirement, a financial advisor can assist you to run the numbers and determine what’s best for your personal finances.
Consider Your Debt
The benefits of a 15-year home loan make it the best option if you can comfortably manage the monthly payments, wish to save on interest, and want to be debt-free. Savings are significant, but only if they don’t put pressure on your budget. Your mortgage should financially empower you, rather than drag you down.
Make absolutely sure you are not surrendering something more crucial so you can afford the higher payments before choosing a 15-year or a 30-year mortgage.
A good rule of thumb is that housing shouldn’t account for more than 30% of the monthly spending. Determine how much you can afford to spend each month on housing, and don’t go above that amount. If a 15-year loan is the best option for you, it will depend on the figure you calculate while considering all the benefits and drawbacks.
Don’t forget that having a good debt service coverage ratio is highly important as well. If you are wondering what is a good debt service coverage ratio talk to an expert at the Mortgage Shop!
Final Thoughts
Your choice of a 30-year vs 15-year mortgage will have an effect on your finances for many years, so make sure to do the math before selecting which is best. A 15-year loan can be a better option if your goal is to pay off your mortgage faster while also being able to afford larger monthly payments. On the other hand, the reduced monthly payment of the 30-year mortgage can enable you to purchase a larger home or free up cash for other financial objectives.
By providing you with customized solutions that complement your financial condition and investment objectives, proper mortgage lenders can save you money and time while helping you locate the ideal mortgage.
The Mortgage Shop, LLC focuses on investment loans, and our solutions are geared to the needs of property investors. Our team of professionals will identify the best credit loan options for your needs, whether you’re searching for short-term and holiday rentals, long-term rentals, or a real estate property investment with up to four units, so you may invest in your next venture without worry. Give us a call to learn more today.
