Trying to decide between a 15-year and a 30-year mortgage? Here are some tips to help you pick which direction might be best for you.
Both the 15-year or 30-year mortgage have pros and cons for buyers. The major difference between the two, which is even detailed in the name, is the length of time you have for repayment of the mortgage. For a 15-year mortgage, you have 15 years to repay the principal and the interest. While for a 30-year mortgage, you have 30 years to repay the principal and the interest. This might seem like a minor difference, but it directly influences the pros and cons of each.
A 30-year mortgage is the most popular mortgage type because it allows borrowers to borrow a greater amount while paying a lower monthly payment. However, this translates into a higher interest rate and more interest paid overtime. Interest rates on a 30-year mortgage typically are higher because it is a riskier mortgage to the lender due to the payback period. The longer it takes to pay down the principal, the more that is paid towards interest. A 30-year mortgage is best for individuals who cannot afford the higher monthly payments of the 15-year mortgage or those who want more flexibility with their payments. With a lower monthly payment, you can pay the minimum when money is tighter and pay more when you have the extra cash to do so. This allows you to pay off your mortgage at the rate that works best for you and does not restrain you to a 15- or 30-year timeframe**. Flexibility does come with a higher long-term cost, shown in the example at the end, but it allows you to choose how you want to manage your money. The final benefit of a longer-term mortgage with higher interest is you can deduct it from your taxes every year***.
A 15 year-mortgage on the other hand allows you to pay off your mortgage quicker and pay less in interest. However, the downside is that the monthly payments are higher and the amount you can borrow is lower. Since 15-year mortgages are repaid over a shorter period they typically have lower interest rates from lenders because they are less risky. The lower interest rate plus the fact that the mortgage is paid down quicker leads to less paid in interest over the life of the mortgage. These loans are quicker to build equity within the home and easy to refinance when the time comes. However, the only way to reduce the monthly payment, if you need to in the future, is to refinance the mortgage. This makes it harder to adjust to sudden changes in your financial situation over time and makes you vulnerable to rate changes. This mortgage type could be best for those who have a higher income and savings to cover expenses should anything change in their financial situation. It is also best for those who like to pay less in interest and want to be mortgage free sooner, this can also include older individuals who want to pay off the mortgage before retirement.
Here is an example of how much you would pay over the life of the mortgage for a 15-year vs. 30-year mortgage for the same loan amount of $300,000*.
- A 30-Year mortgage with a rate of 3.2% for $300,000 would have a monthly payment of $1,038 a month but would pay $133,651 in interest over the life of the loan*.
- A 15-Year mortgage with a rate of 2.7% for $300,000 would have a monthly payment of $1,623 a month but would pay $52,138 in interest over the life of the loan*.
The 30-year mortgage has a monthly payment that is $585 more a month than the 15-year because of the higher interest rate and longer payback period. However, the 30-year payment will pay 2.5x the amount or $80,513 more than the 15-year mortgage interest over the life of the loan.
Hopefully, this can help guide you to the best mortgage option for yourself. Best of luck with picking which option is best for you!
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* These numbers are used for illustrative purposes only, and in no way represent what a buyer will pay during closing. Contact a financial advisor for more information.
**Be sure to check with your lender on the minimum time frames to payback a 30-year mortgage without penalty. All mortgage plans are different.
***This is for informational purposes only and does not in any way state if you can deduct mortgage interest from your taxes. Contact a tax advisor to determine how much mortgage interest you can deduct from your taxes.