15-year or 30-year. That is the question.
Your negotiated mortgage term will have a huge impact on how much you will pay towards your loan each month. Although you may not be able to fully predict the next 15 to 30 years of your financial future, you’ll want to prepare yourself for a loan that fits into your lifestyle and budget. Choosing which loan type is best for you will be unique to your financial situation at the time of purchase, but such a major decision can feel daunting. The Home Loan Expert is here to show a comparison of a 15-year vs. a 30-year mortgage so you can make a more confident decision when it comes to choosing your mortgage term.
15-Year vs. 30-Year Mortgage: It All Comes Down to Interest Rates
In the US today, the majority of home buyers still opt for a 30-year, fixed loan term that comes with lower, constant monthly payments. Alternatively, 15-year loan terms are available which are perking more interest from home buyers. Why would anyone choose a 15-year loan term with higher monthly payments when you could choose the slow and steady 30-year term with lower monthly payments?— interest rates.
Interest rates on a 30-year loan term are higher than a 15-year term because it is riskier for the lender to issue the loan for a longer period of time. The longer the loan balance remains outstanding, the higher risk of a borrower defaulting on their loan. Higher risk means a higher interest rate paid over a longer period of time, which will end up costing hundreds of thousands of dollars paid over the life of your loan. A 15-year term on the other hand rewards the borrower with more favorable interest rates because it poses less risk to your lender. It is also paid over a shorter period of time, which also significantly lessens the amount you pay in interest over the life of your loan.
Although home owners can save in the short run on monthly payments with a 30-year loan term, in the long run, home owners will be making payments twice as long as they would compared to a 15-year mortgage. In fact, over the full life of a loan, a 30-year mortgage will end up costing more than double the 15-year option.
So why would a home buyer want to go with a 30-year mortgage term?
Pros to a 30-Year Mortgage Loan
Your loan term comes down to affordability and what works within the budget you’ve created for your lifestyle. There are some advantages and disadvantages to a 30-year term. The opportunity cost tradeoff for some homeowners works more in their favor with a 30-year term. This is what you should consider when deciding if a 30-year mortgage term is right for you:
- More affordable. Having lower monthly payments makes owning your own home a more manageable feat. The 28% rule can be used as a guideline for how much your monthly payments should be. It states that you should spend 28% or less of your monthly gross income on your mortgage payment
- More [purchasing power for more house. Home buyers who opt for a larger loan under a 30-year term with lower monthly payments may be positioned to buy more house than they would be able to afford with a 15-year loan.
- More capital available to invest. Many homeowners bank on their homes to be a store of investment. By having more freely available capital with lower monthly payments, homeowners can distribute income more evenly among other financial investments.
- More savings-building. Similar to wealth-building, allotting a portion of your income in a savings capacity can also be accomplished with lower monthly payments.
Ideally, saving more money in interest is in a homeowner’s best interest. On the same note, missing out on the financial and physical security provided by owning your own home is a risk in and of itself. It is better to buy a home with more affordable monthly payments over a longer term than not to buy a home because you are waiting to position yourself for a 15-year term. While you will pay more in interest, you will also start building equity faster and the appreciating value of your home even after one year makes homeownership a worthy endeavor. Choose a monthly payment option that suits your budgeting needs and fits your lifestyle. Remember— there are other ways to save on interest like mortgage points, making extra or biweekly payments, and eventually, refinancing into better rates and terms down the road.
Pros to a 15-Year Mortgage Loan
So how is it that making higher monthly payments isn’t the raw end of the mortgage deal? You may be making more aggressive monthly payments, but it is a bit like ripping the band-aid off when you pay off your loan quicker. Here are some reasons to consider a 15-year loan term are:
- More savings. Interest rates on a 15-year mortgage are priced competitively lower than rates on 30-year terms. The average interest rate for a 30-year mortgage was around 0.5–1% higher than a 15-year mortgage for the past several years. In addition to paying a lower interest rate, homeowners will also be paying interest for less time over the life of the loan resulting in more savings.
- More freedom from debt sooner. With a 15-year loan term, homeowners will be in debt for half of the time as they would on a 30-year mortgage as they can pay off the principal on the loan more quickly. This allows homeowners to more readily free up their income, giving them peace of mind and an opportunity to make other financial investments.
- More home equity, faster. Equity is a homeowner’s greatest asset. It is determined by appraising the market value of your home minus what you still owe on the principal balance. Your initial monthly payments go towards the interest on your loan. With a 15-year term, you can pay off the interest more quickly and start paying off your mortgage principal, which is where all of the equity is stored. That equity can then be applied in a variety of ways like debt consolidation, home renovations, and other investment opportunities to put homeowners in a better financial position.
Homeowners on a 15-year term might be on a stricter budget when it comes to lifestyle spending habits to accommodate their higher monthly payments. Apart from having wiggle room and enough money to enjoy a certain quality of life, you’ll also want to ensure you are still financially prepared for a potential costly emergency or unexpected life event. It is recommended that you have 3 months of savings to cover the cost of living expenses in case of a sudden financial disruption. Each home buyer will need to crunch the numbers on their own to determine what works best for them financially.
How Can The Home Loan Expert Help?
More than 10 years ago, The Home Loan Expert started with a local vision that has now expanded nationwide to help homeowners across the country get the best deal possible on their loan. Our friendly lending experts are from the same communities we serve, making us able to guide you in finding a loan that is suitable to your unique needs as a home buyer. Whether you need help deciding if a 15-year mortgage term or a 30-year mortgage term is right for you, we can help walk you through that process.
Our in-house underwriting process also helps you save on costs while providing the fastest loan approval rates in as little as two weeks!
So give us a call at 800-991-6494 to find out which loan term you should choose to position yourself better financially. We’re also available through our application anytime to discuss what kind of loan term makes the most sense for your lifestyle and budgeting needs.
