15-Year or 30-Year Mortgage: Which One Is Right for You?
Talk about commitment! 15 years or 30 years? Both are a long time; both have pros and cons, and “Which should I choose?” is an important question to ask yourself, your family, and your mortgage banker. Here’s what you need to know about the two different lengths of mortgages.
Right off the bat, 15 years sounds like quite the deal. It’s also less risky for lenders. With the 15-year fixed-rate mortgage, you pay more a month than with the 30-year, which sounds like a deal breaker, but it really depends on what you're able to afford and what you’re able to borrow from a lender. If it’s not a problem for you to afford a 15-year-loan, which can be clarified by a loan officer, then that may be the best option for you.
15-year fixed-mortgages are especially a great option if you’re approaching retirement.
With a 15-year mortgage, you’ll get to pay off your mortgage quicker and focus on other things with your life, like retirement, or college for the kids. With a shorter mortgage you usually get the plus side of having lower rates, so you’re saving a lot more in the end than with a longer mortgage. Additionally, since you’re paying for a shorter amount of time, the total interest you pay over the life of the loan will be significantly lower, allowing you to build equity faster.
The 30-year fixed-rate mortgage is the most common in the United States. Compared to the 15-year mortgage, the 30-year has lower monthly payments, which makes it more affordable. But, you pay interest for a longer period of time, making the actual cost of the home loan much higher in the end.
Although the rates on a longer mortgage are higher, the monthly payments are low enough that it tends to outweigh the positives of a shorter mortgage for many people. For some homebuyers, having a lower monthly mortgage payment allows them to pay off other debts, making it easier to then contribute more to the principal balance of their mortgage and pay off the home in less than those 30 years. Both loans are typically fixed-interest loans, where the total monthly amount of principal and interest remains the same, but the allocation to each changes over time. In the beginning of most loans, the majority of your payment goes towards interest. But over time, your monthly payments start going more towards the principal balance. In the 30-year loan (compared to the 15-year loan), that shift is much slower, resulting in a slower increase of equity. The benefit of speaking with a mortgage banker is that you’ll get better clarification on your ability to get a 15-year mortgage or a 30-year mortgage. A lot of homebuyers think they won’t qualify for a 15-year loan or think that the payments will be double that of the 30-year loan, but that’s rarely the case and entirely depends on your specific financial situation.