Once you decide to become a homeowner, you will likely need to take out a mortgage to buy your new home. While the conclusion that you need a mortgage to finance your home is usually easy to reach, deciding which one is right for you can be overwhelming. One of the many decisions a potential buyer must make is choosing between a 15-year and a 30-year mortgage.
Just by looking at the names, it's hard to tell which is the better option. In ideal circumstances, a 15 year mortgage makes mathematical sense as a better option. However, the road to home ownership is often far from ideal (and, joke, under ideal circumstances we would all have large sums of money to buy a home for cash) So the better question for home buyers is which one is best for you.
To help you make informed financial decisions, we'll outline the differences between the 15-year and 30-year mortgage, the pros and cons of each, and which options one is better suited to based on your financial priorities .
The difference between 15 year and 30 year mortgages
The main difference between a 15 year and a 30 year mortgage is the amount of time that you promise to repay your loan, also known as the loan term.
The loan term of a mortgage can affect other aspects of your mortgage such as interest rates and monthly payments. The loan terms are of different lengths, e.g. B. 10, 15, 20 and 30 years. However, we are discussing the two most common options here.
What is a 15 year mortgage?
A 15 year mortgage is a mortgage that is meant to be paid off in 15 years. This shorter loan term means that your loan will be repaid faster than other loan terms, also known as the gradual repayment of your loan.
What is a 30 year mortgage?
On the other hand, a 30 year mortgage will be repaid in 30 years. This longer term means that the payback will be slower.
Advantages and disadvantages of a 15 year mortgage
The shorter loan term of a 15 year mortgage means more money will be saved over time, but affordability will be hurt by higher monthly payments.
Lower interest rates (often by a full percentage point!)
Less interest is paid over time
Higher monthly payments
Less affordability and flexibility
Advantages and disadvantages of a 30 year mortgage
As the mortgage term chosen by the majority of American homebuyers, the longer 30 year term has the advantage of affordable monthly payments but comes at the expense of more money paid in interest over time.
Lower monthly payments
More affordable and flexible
Higher interest rates
Over time, more interest was paid
15 year mortgage
30 year mortgage
• Lower interest rates
• Less interest is paid over time
• Lower monthly payments
• More affordable and flexible
• Higher monthly payments
• Less affordability and flexibility
• Higher interest rates
• More interest will be paid over time
What is better for you?
With what you know about the pros and cons of each repayment period, you can use that knowledge to help align your financial priorities with the mortgage that works best for you.
The best way to save money over time: 15 year mortgage
The 15 year mortgage is best for those who want to spend less on interest, have a generous income, and also want a steady amount of savings. A 15 year mortgage should have enough income to cover higher monthly mortgage payments among other living expenses, and sufficient savings are important to act as a buffer in an emergency.
Best for Monthly Affordability: 30 Year Mortgage
A 30 year mortgage might be best if you are looking for stable and affordable monthly payments or if you want more flexibility in how you save and spend your money over time. The longer loan term may also be a better option if you are looking to buy property that you cannot usually afford to pay back in just 15 years.
Best of both: 30 year mortgage with additional payments
Do you want the best of both worlds? A good option to save interest and get affordable monthly payments is to opt for a 30 year mortgage but make additional payments. You can still aim to repay your mortgage in 15 or 20 years for a 30 year mortgage. However, this option can be more forgiving when life happens and you fail to achieve that goal. Before you go down this route, you should check with your lender about any prepayment penalties that may eliminate the need for interest savings through early payments.
As a potential home buyer, it is important that you prepare for financial success. Optimizing your personal budget and carefully saving and paying off your debts can prepare you for the next steps in buying a new home. By doing your research and learning about mortgages, you can also make decisions that are in your best interests.
When choosing a mortgage, always keep in mind what is financially realistic for you. If that means foregoing better interest savings in the name of affordability, remember that this path still leads to home ownership. Try these budget templates for your home or monthly expenses to keep you well on your way to achieving your goals.
swell: Bureau of Financial Consumer Protection
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