To determine whether a 30 year or a 15 year mortgage is the right one for you, let’s take a look at the benefits and disadvantages of both.
Fifteen year mortgages do have higher monthly mortgage payments for the homeowner but can also provide substantial savings. Mortgage rates for a 15 year fixed rate mortgage are almost always lower than rates on longer term loans. With lower interest rates on the 15 year mortgage, less interest on the mortgage accrues each month, saving the borrower on overall interest throughout the life of the loan.
Secondly, 15 years is 15 years. With a 15 year mortgage, your loan can be paid in full in 15 years. With a 15 year fixed rate mortgage, loan payments are heavy on principal and lighter on interest, and they are complete in just 180 months. With the combination of lower interest rates on the mortgage loan and a shorter term on the repayment schedule, those electing a 15 year fixed rate mortgage could save thousands of dollars over those electing a 30 year fixed rate mortgage on the same principal.
Alternatively, the 30 year fixed rate mortgage is built a little differently. In general, the 30 year fixed rate mortgage first payment is 35% principal and 65% interest; conversely, the 15 year fixed rate mortgage first payment is 66% principal and 34% interest. A 15 year fixed rate mortgage aggressively pays down principal, while the 30 year fixed rate mortgage does not. However, the 30 year mortgage allows borrowers to enjoy a lower monthly payment, since the repayment schedule is stretched out over a longer period of time. In most cases, mortgage payments do not include the same ratio of principal-to-interest until year 18 of the repayment schedule in a 30 year fixed rate mortgage.
While the 15 year mortgage can provide tremendous savings to a homeowner in lower interest rates and shorter terms, the monthly payments on a 15 year mortgage can be considerably higher than the payments on a comparable 30 year loan. At today’s rates, the payments on a 15 year loan can be up to 50% higher than payments on a 30-year loan. In some circumstances, the higher monthly payment on a 15 year mortgage can break the household budget. The higher monthly payments can also make it more difficult for potential homeowners to qualify for a mortgage because of debt-to-income requirements compulsory to the lender. Before choosing a 15 year mortgage, it is imperative that you be sure that the monthly payment is manageable for your household.
With a 30 year fixed rate mortgage, the borrower has more opportunity to invest or save according to their personal financial goals. With the 15 year fixed rate mortgage, the homeowner gains equity more rapidly.
Things to Consider When Choosing Between a 15 or 30 Year Mortgage
The crucial questions borrowers must consider and answer include determining if they are confident that, if they elect the higher monthly payments of a 15 year fixed rate mortgage, they will be able to successfully meet the obligation over the entire 180 month term (unless they sell or refinance); does the lower monthly payment of the 30 year fixed rate mortgage allow for more comfort with their household budget for meeting other financial goals; which mortgage will meet the debt-to-income ratio required for loan approval and, finally, will the lower payments of the 30 year fixed rate mortgage allow for improvements to increase the value of the property.
It is a lot to consider and, the wise mortgage shopper, will certainly want to consider all options. Speaking with your lender is the first step in researching your resources.