The Difference Between Getting a 15-Year and 30-Year Mortgage
Home buyers have many choices when considering a home mortgage. One of those choices is how many years will it be before the mortgage is paid in full. Conventional mortgages often offer two main pay-off periods; a 30 year and a 15 year mortgage. However, there are other differences between a 15-year mortgage and a 30-year mortgage other than just the time it takes to pay off a mortgage. Before making a decision between a 15-year or a 30-year mortgage, it can be valuable to consider these differences and the impact they can have on a Kingstowne new home buyers financial future.
Interest Costs of 15 Year Mortgages vs. 30 Year Mortgages
Assuming minimum monthly payments will be made over the entire course of the loan, a homeowner can save money with a 15-year mortgage over a 30-year mortgage. These savings come in two ways. First, since the repayment period is shorter, the interest cost will be less over the life of the loan than a 30 year loan. Secondly, interest rates tend to be lower on 15-year mortgages than over 30-year mortgages.
For example, a $200,000 loan over 30 years at 5% interest costs $186,640 in total loan interest expense. Whereas the same $200,000 loan secured for 15 years at 4.5% interest would result in a total of $75,398 in a interest costs, or a savings of $111,242 in interest! Online loan calculators can help borrowers determine how changes in terms, down payments and interest rates can affect these loan payment amounts.
15 Year Mortgage Payments are Higher Than 30 Year Mortgages
While the interest savings of a 15-year loan over a 30-year loan can be fairly dramatic, there are other considerations. Mortgage loan payments, for example, are minimums. And in most cases, the monthly mortgage payments on a 15-year mortgage are higher than those of a 30-year mortgage. This is because the borrower is having to pay more of the principal amount at a faster monthly rate using only 15 years, or 180 months vs. dividing the principal over 30 years or 360 months.
In addition to the lower monthly mortgage payments that 30 year mortgages offer, 30 year mortgages give the borrower flexibility to pay more in principal if they choose. Some borrowers are more comfortable with a lower payment in case a financial emergency occurs or to allow for savings for college or retirement. Many feel it is better to secure a 30-year mortgage and make extra payments or pay an additional amount as budget allows. The downside, of course, is that borrowers in this scenario don't get the advantage of lower interest rates from a shorter mortgage. Borrowers with 30 year mortgages should also confirm that their mortgage holder doesn't charge a prepayment penalty and allows for an early payoff.
Paying Down a 30-Year Mortgage Is a Tediously Slow Process
Without a significant down payment, paying down (and therefore building ownership equity) in a 30-year mortgage can be agonizingly slow. A 15-year mortgage, however, can build equity reasonably quickly. Keep in mind, however, tapping into that equity can have closing costs associated with it in a refinance. That means money in the bank or in other more liquid assets is much more accessible than a home equity loan. Some borrowers, however, like the “forced savings” of a 15-year mortgage.
It May Make Sense to Pay Off Higher Interest Debt First
Generally speaking, mortgage debt carries the lowest rate of interest of any debt. Many believe that rather than choosing to pay more in mortgage payments each month with a 15-year mortgage vs. a 30-year mortgage, it makes more sense to use the money to pay off higher interest debt. This debt can include credit cards and other forms of unsecured debt. That higher $500 per month mortgage payment paid on a 15-year mortgage vs. a 30-year mortgage could quickly pay off much more costly credit card debt faster than it could by paying down a lower interest rate mortgage.
Ultimately, the choice of either a 15 year or 30 year mortgage is the borrower's and what they are comfortable with. In any case, borrowers should speak to a reputable home lender or mortgage broker to explore all of their mortgage options.