In Home Loans, Tips & Advice

Key Factors to Consider When Deciding Between Mortgage Loans

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If you’re buying a new home, you’ve got a lot of decisions to make. Don’t let choosing between a 15-year and 30-year mortgage term keep you up at night. Let us make that decision a bit simpler. But first, it’s important to understand the difference between a 15-year fixed-rate mortgage and a 30-year fixed-rate mortgage.

The 15-year home loan is considered a short-term mortgage. This type of home loan typically comes with a slightly lower interest rate, but higher monthly payments because they’re not spread out over as much time. Because the term is shorter, you’ll pay significantly less toward interest and can save thousands over the life of the loan. With a 15-year loan, more of your monthly payments will go toward principal each month, which means you’ll build equity at a faster rate. In general, a 15-year mortgage costs you less over time.

Considered a long-term mortgage, the 30-year fixed-rate mortgage offers lower monthly payments since they’re spread out over a longer period of time. However, because you make more payments, you also pay more in interest over time. Lower monthly payments are more appealing to most home buyers, but with a 30-year loan, you won’t build equity as fast.

There are clear pros and cons to both a 30 and a 15-year mortgage. The biggest bonus of the 15-year term is that it typically comes with a lower interest rate, because the 15-year mortgage is less risky to lenders, whereas a 30-year loan typically carries a higher interest rate. (Although today’s interest rates are still considerably low for both.) On the flipside, a 30-year mortgage has a relatively low payment, making it more affordable to most buyers. Or, buyers who can afford a higher payment may opt for a larger home with a bigger price tag and a 30-year term, rather than paying less for a smaller home with a 15-year payment.

Choosing which one is right for you is largely dependent on these key factors:

How much can you afford in monthly mortgage payments? This is certainly the most important consideration when trying to decide between a 15- and 30-year home loan. A 30-year mortgage stretches the payments out over more time, so your monthly payment is less, although you’ll pay more in interest over the life of your loan. A 15-year mortgage comes with a higher monthly payment, but typically a lower interest rate, and in the long run, you’ll end up saving thousands on interest. But not every homeowner can afford a 15-year mortgage – 30-year home loans are generally more popular than the 15-year term. To calculate the difference between a 15-year and 30-year mortgage, try using our Mortgage Payment Calculator.

How long do you plan on staying in your home? Because more of your monthly payment goes toward principle with a 15-year term, you’ll build up equity more quickly, which can be appealing if you don’t plan to stay in your house for the long haul. However, if you plan to be in your home for at least seven to 10 years, a 30-year loan may be the better option. If you are nearing retirement and can afford the higher payment, go with the shorter loan so you’ll be able to get your home paid off more quickly, since you’ll be dependent on a fixed income once you retire.

What are your other financial goals? Since you’ll have a lower monthly payment, a 30-year mortgage allows you to build up some savings or contribute funds toward other financial goals, such as paying down other debt or investing in your retirement. With the market’s current low mortgage rates, it may be more financially beneficial to take the difference between payments for the 15- and 30-year loan and invest it in high-yielding stocks or securities.

Still not sure which option to choose? It is possible to get the best of both worlds, so to speak. Sign up for a 30-year-mortgage, but plan to put an extra 50 percent of your monthly payment toward principle each month. If you keep it up, you’ll pay if your loan in 15 or 20 years, pay thousands less in interest, and have the safety net of the lower monthly payment if things get tight and you can’t afford to make the higher payment.

Choosing between a 15-year and 30-year home loan isn’t the only choice you have to make when financing your home. If you’re ready to purchase or refinance your home, contact PrimeLending today to speak with a home loan expert near you.

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