15-Year Mortgages vs. 30-Year Mortgages
Are you in the market for refinancing a current mortgage, or are you thinking about purchasing a home or investment property? If so, you may be wondering which type of mortgage is right for you: a 15-year mortgage or a 30-year mortgage. Both options have their pros and cons, so it can be difficult to decide which one is best for your unique situation. In this blog post, we’ll compare 15-year mortgages and 30-year mortgages and help you decide which option is right for you.
A 15-year mortgage is often recommended as a lower monthly payment option to 30-year mortgages; however, many financial advisers caution about the risks of not having your mortgage paid off in 15 years. First, before you even begin to think about homeownership, it is very important that you work toward paying down any credit card debt and student loans that you have. The Federal Trade Commission suggests that your total monthly debt payments, including mortgage repayment, should not exceed 36 percent of your gross income. This is to ensure that you can afford to repay your debts if things go awry.
Looking at the numbers
A 15-year fixed-rate mortgage generally carries a rate that is about 0.25 to 0.50 percent below the rate of a 30-year fixed-rate mortgage, so you can save some money on interest along the way. But is it worth it? Let's say that you take out a loan and you’re comparing both a 15-year and 30-year repayment term. Your payments will be less with a 30-year mortgage, but with a 15-year mortgage, you’ll be paying more into principal. This means that although your 15-year mortgage payments are higher, the extra money is going towards your home equity, rather than toward interest. It will also only take you 15 years to pay off your home loan rather than 30 years.
If smaller monthly payments are a priority, however, it might actually be advantageous to choose a longer repayment term.
Additional advantages of a 30-year mortgage
There are some additional benefits of choosing a 30-year mortgage over a 15-year term. For example, you can buy more home with your money with a 30-year mortgage, since the monthly payments are lower. Even though this might seem counterintuitive to buying less house, remember that 30 years of monthly payments that are more affordable can be a more comfortable solution for some borrowers, compared to 15 years for building equity in your home.
When you choose a 30-year term over a 15-year term, you are less likely to go delinquent on your payments, which can affect your credit score. Additionally, remember that if you fall far too far behind on your mortgage payments, you run the risk of losing your home to a short sale or a foreclosure. Unless you are absolutely confident you can comfortably afford the higher payments with a 15-year mortgage, opting for a 30-year mortgage may provide you with more peace of mind.
Choosing a mortgage term
So should you choose a 15-year mortgage or stick with the 30-year option? The answer all depends on what is most important to you. If it's not worth it for you to pay more each month in order to have your home paid off in 15 years, then a 30-year mortgage might be the way to go. On the other hand, if you plan on staying put and not have any major life changes that will affect your income, a 15-year mortgage may be perfect for you.
You should never let the terms of your mortgage affect your decision to buy a home, however. The home is something that can be lasting and positive for you and your family, no matter how long the term lasts. Be sure to also discuss your various options with several mortgage brokers, lenders, and banks. Compare all of your options, shop around for different rates, and carefully weigh the pros and cons of each type of mortgage before making any final decisions.