15-year or 30-year mortgage? Which is right for you?
Shopping for the perfect home is already stressful; throw on top of that trying to figure out what home loan to choose from, and you may find a few new gray hairs. Home loans come in all shapes and sizes: 15-year fixed-rate, 30-year fixed-rate, land loans, construction-to-permanent, combination loans, jumbo loans, VA, and 20-year or less. For most, the 30-year fixed-rate mortgage is the standard go-to option. While it may be the most popular home loan option in the U.S., it may not be the best in terms of overall savings. Many buyers could be better served with a shorter term loan like the 15-year fixed rate.
So how do you know which term loan is best for you? Looking at the benefits and drawbacks of both the 15-year and 30-year loan will help you make a more informed decision about your home loan.
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15 year fixed rate
The biggest sticking point for most people who are considering this shorter term loan is the higher monthly payment. Since the term is shorter you are paying more towards your loan principal every month. While the payment is higher in the short term, what you save in interest is greater in the long term. The amount you pay in interest with a 15-year loan is almost half of what you would pay for a 30-year loan; we’re talking tens of thousands of dollars in interest you could be saving. On top of that, this loan is less risky for financial institutions so the interest rate is usually lower than a 30-year term.
Another benefit is since you are paying more principal every month, your home builds equity quicker. You’re investing for the future by taking care of your biggest asset, your home.
The most important thing to consider for this loan is being able to afford the payment. In general, your mortgage payment shouldn’t be more than 28% of your gross monthly income. You should also take into consideration any other personal issues that could arise such as possible job loss or family issues that could affect your ability to make your payments.
30 year fixed rate
The most attractive feature of this loan is the lower monthly payments. You’re not locked into the higher monthly payments since your loan term is longer. What’s great about this is that you have more money to save for other things such as a college fund, investments, retirement, or an emergency fund. There’s also more flexibility in a 30-year loan; you can make extra monthly payments (when you can afford it) to help pay down your loan quicker and save on interest.
The flexibility of this loan is great, but there is another side to it. While we all have good intentions about making extra payments on our mortgage every year, let’s be real. Since there is no fixed commitment to make extra payments, most people don’t do it. So if you go this route and want to make extra payments you may want to have them come out automatically to help ensure follow through.
Another attractive feature of this loan is that with a longer term you can usually get more home for your money if you can afford the payments. This means if you can afford the higher payments of a 15-year loan on 2000 square foot home, you could get a larger home for the same payment over 30 years. However, be aware that a larger home also requires more upkeep and repairs.
Each one of them has its own strengths and weaknesses, understanding them and how they will affect you is critical in your decision-making process.
15-Year Mortgage vs 30-Year Mortgage. Which Is Right For You?