Differences Between a 15-year Mortgage and a 30-year Mortgage
While there are many different types of mortgages, subcategories and a whole world of navigation when it comes to purchasing a home, there are two major timelines that are at the forefront of the home-buying experience: 15-year and 30-year mortgages. While the standard 30-year, fixed-rate mortgage is the most affordable and comfortable option for over two-thirds of home buyers, the 15-year option is often very appealing to certain groups of people. If you are in the market to purchase a new home, here is a breakdown of some of the common differences between a 15-year and a 30-year mortgage. Choosing the right mortgage length can save you thousands of dollars.
No matter which mortgage length you ultimately end up choosing, both are structured in a relatively similar manner. The obvious major difference is the length of the term; this will translate into a higher monthly payment on the 15-year mortgage. While the 15-year mortgage obviously costs more up front, this duration of loan often comes with a lower interest rate. The 30-year mortgage will end up costing the homeowner significantly more money in interest over the life of the loan. In fact, depending on your locked-in interest rate, many 30-year mortgages end up costing nearly double that of a 15-year loan when you factor in interest, extra closing costs and additional fees.
With a fixed-rate loan, both the interest rate and the monthly payment do not change for the entire life of the loan unless you refinance the home at some point in the future. Due to the payment being a fixed amount, the allotted portion going towards the actual principal and the portion going towards the interest rate will change as the loan reaches maturation. Initially, a much larger percentage of your monthly payment goes towards the interest rate versus the principal balance. This is why many homeowners call their mortgage company each month to make an additional payment that is to be directed specifically towards the principal balance. In many cases, there is no penalty for prepayment on a fixed-rate mortgage. Homeowners can shave many years off of their total loan duration by paying an extra sum of money on their principal balance each month.
With a 30-year mortgage, your loan balance decreases at a much slower rate. Banks find 30-year mortgages much more of a risk to finance, so they may impose a higher interest rate. A 15-year mortgage requires a much higher monthly payment, but banks view this loan as a low-risk transaction with qualified buyers; homeowners can expect to pay a lower rate of interest for this loan duration. The higher the interest rate gap, the more you can expect to pay for a 30-year mortgage compared to a 15-year mortgage.
Many of the government-supported agencies that are behind the mortgage companies impart additional fees that make a 30-year mortgage much more expensive. First-time home buyers, people with lower credit scores and borrowers with small down payments should expect to pay these loan level price adjustment fees.
With a 30-year loan, you may be able to buy more home than you would be able to finance with a 15-year loan. A smaller monthly payment translates into the ability to take out a larger loan amount since it will be spread out over the course of 30 years in lieu of 15 years. The lower monthly payment on a 30-year loan also lets the borrower save more money or frees up funds to put towards other goals, bills, vacations or expenses.
Which Mortgage Length Is Right For You?
If you are about to retire, you are looking to flip a house relatively quickly or you do not plan to be in your home for the long haul, a short-term, 15-year mortgage makes the most sense. Also, if you can afford the 15-year mortgage, you will save yourself a lot of money in interest charges. If you plan to to utilize your new home as part of a living will and estate, pass your home down to your children or are using the house as an investment, a 30-year mortgage may make the most sense for your budget and long-term goals. No matter which option you choose, there are pros and cons to both. Consult with your mortgage broker to determine which mortgage length works best for your budget and long-term goals. Proudly been helping customers find the right mortgage. Contact Us Today To Get Started.