If you’re new to the world of buying real estate, you’ll quickly discover that you have lots of choices when it comes to selecting the right lender, as well as selecting the right loan. One particular option you’ll need to weigh before buying a home is whether a 15-year or 30-year mortgage makes the most sense for you.
There are several factors you’ll need to consider when you decide how long you want to spend paying off your mortgage. It may seem as if your decision should be based strictly on getting the best interest rate and lowest monthly payment, but there are other factors to consider – like your lifestyle, income and budget – that affect your financial future.
What’s The Difference Between A 15-Year And A 30-Year Mortgage?
America’s most popular mortgage is the 30-year fixed-rate mortgage, but it’s not your only option.
One alternative to the 30-year fixed is the 15-year, fixed-rate mortgage. People with a 15-year term pay more per month than those with a 30-year term. In exchange, they are given a lower interest rate and will pay their loan off faster. Borrowers with a 15-year term pay their debt in half the time and possibly save thousands of dollars over the life of their mortgage.
In addition to fixed-rate mortgages, borrowers may also want to consider adjustable-rate mortgages, which are popular for their low introductory rates, particularly if the borrower doesn’t plan on living in the home for longer than the initial rate period.
15-Year Vs. 30-Year Mortgage: Monthly Payment
When comparing a 15-year mortgage to a 30-year mortgage with the same interest rate and loan amount, the monthly payment for the 15-year mortgage will be higher. This is because the borrower is repaying the loan in half the time, so each monthly payment has to cover a larger portion of the principal.
Let’s break this down with an example. Keep in mind, the following examples used don’t include property taxes and insurance.
Suppose we take a loan amount of $300,000 at an interest rate of 6.0% APR.
- Loan amount: $300,000 at 6.0% APR
- 30-year mortgage monthly payment: $1,798.65
- 15-year mortgage monthly payment: $2,531.57
The 15-year mortgage has a significantly higher monthly payment ($2,531.57 vs. $1,798.65) due to the shorter repayment term. This underlines the importance of ensuring borrowers can afford the higher monthly payment associated with a 15-year mortgage.
15-Year Vs. 30-Year Mortgage: Interest Rates
In the mortgage world, it’s common to find that 15-year mortgages often come with lower interest rates than 30-year mortgages. This is because lenders typically view shorter-term loans as less risky since they’ll be paid back more quickly. Consequently, they may offer a more favorable rate.
- Loan amount: $300,000
- 30-year mortgage monthly payment at 6.0% APR: $1,798.65
- 15-year mortgage monthly payment at 5.5% APR: $2,451.25
This example demonstrates that, although the 15-year mortgage comes with a higher monthly payment, the reduced interest rate can lessen that monthly payment amount slightly compared to what it might be if the 15-year mortgage had the same rate as the 30-year mortgage.
For example, if the 30-year loan had a 5.5% interest rate, the monthly payment would be $1,703.37. That’s a difference of about $95 every month, showing the impact even a small drop in interest can make because of a shorter term.
15-Year Vs. 30-Year Mortgage: Lifetime Interest Paid
Over the life of a mortgage, the amount of interest you pay is not only determined by the rate but also the length of time you’re paying that interest. A shorter term, like a 15-year mortgage, combined with a potentially lower interest rate means you’re likely to pay significantly less in total interest compared to a longer, 30-year term.
- Loan amount: $300,000
- 30-year mortgage total interest paid at {6.0%} APR: $347,514.57
- 15-year mortgage total interest paid at {5.5%} APR: $141,225.07
This illustrates the significant interest savings of choosing a shorter mortgage term. In this example, by opting for a 15-year mortgage instead of a 30-year mortgage, the borrower saves a whopping $206,289.50 in interest over the life of the loan. While the monthly payments for the 15-year mortgage are higher, the long-term savings can be substantial, emphasizing the financial advantage of the shorter loan term and potentially lower interest rate.
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What Are The Pros And Cons Of A 15-Year Mortgage Loan?
As with all things, there are both benefits and drawbacks to having a 15-year mortgage term.
Pro: Own Your Home Sooner
A major benefit of going with a 15-year mortgage is that you’ll own your home free and clear in 15 years. You’ll be free of mortgage payments after that. Many people look forward to being debt-free sooner. If that sounds like you, a 15-year mortgage may be the way to go.
Pro: Build Equity Faster
With a 15-year mortgage, you also build home equity faster. Home equity is the portion of your property that you own. It’s the difference between what your home is worth and what’s left on the loan.
When you pay off your mortgage at double speed, you build up equity at a quicker pace. That means you may be able to refinance your mortgage quicker if better rates become available, you need cash to undertake renovations or you want to buy an investment property.
Con: Higher Monthly Payments
Life happens, and sometimes, it happens quickly. Before you commit to a higher monthly mortgage payment, take an honest look at your monthly budget and savings and consider your lifestyle. You don’t want to end up house poor, meaning all your money goes into your house, leaving you with little left over for other expenses.
Con: May Be Harder To Qualify
Since a 15-year mortgage requires you to make larger monthly payments, lenders want to be sure that you have the ability to repay the loan. Because of this, a 15-year mortgage could be harder to qualify for than a 30-year mortgage.
What Are The Pros And Cons Of A 30-Year Mortgage Loan?
Now that we’ve examined the pros and cons of a 15-year home loan, let’s do the same for a 30-year mortgage.
Pro: More Borrowing Potential
A 30-year mortgage could offer borrowers the potential to afford a more expensive home due to lower monthly payments. However, this longer repayment period can tempt some to exceed their financial limits. It’s crucial for home buyers to stay within their budget and avoid overextending themselves.
Pro: More Flexible Requirements
A 30-year mortgage could come with more lenient income requirements compared to a 15-year term. The extended repayment period results in lower monthly payments, making it easier for borrowers to meet lenders’ debt-to-income criteria. Consequently, this can enhance the accessibility of homeownership for individuals with varying income levels.
Con: Takes Longer To Own Your Home
A 30-year mortgage extends the time it takes to fully own your property, keeping a lien on the home for twice as long as a 15-year term. This longer lien duration can prolong the sense of indebtedness and delay the satisfaction of complete homeownership.
Con: More Lifetime Interest Paid
By their nature, a longer-term loan means more time spent paying interest. Combined with the long repayment term, interest rate charges are higher on a 30-year mortgage. This means you’ll end up paying more over the life of the loan than you would for a 15-year mortgage with the same interest rate.
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When Should You Refinance To A 30-Year Mortgage or a 15-Year Home Loan?
Refinancing to change your mortgage term can impact your finances, whether you’re thinking of shortening your loan duration from a 30-year to a 15-year or extending it in the opposite direction. Each option has its own set of advantages and implications tailored to different financial situations and goals. Wondering if it’s the right choice? Here are a few common situations in which one option could make more sense.
30-Year Mortgage To 15-Year Mortgage
Considering a shift from a 30-year to a 15-year mortgage? Here’s when it might make sense:
- Income rise: A significant income boost can make higher monthly payments of a 15-year mortgage manageable.
- Better credit score: An improved score since your original loan might get you more favorable refinance terms.
- Lower interest rates: If rates are currently lower than your existing mortgage, you stand to save.
- Significant time remaining on current loan: With over 15 years left on your 30-year mortgage, the switch could be beneficial.
However, weigh the potential interest savings and quicker home equity build against refinancing costs and ensure you’re at least 6 – 24 months into your original loan before considering this move.
15-Year Mortgage To 30-Year Mortgage
Let’s delve deeper into the reasons why some homeowners might consider refinancing from a 15-year to a 30-year mortgage:
- Financial flexibility: Life can throw curveballs – job loss, medical emergencies or unexpected large expenses. A 30-year mortgage can substantially decrease monthly payments, granting homeowners temporary financial relief.
- Addressing other debts: A lower monthly mortgage payment can help homeowners allocate funds toward other high-interest debts, making overall debt management more efficient.
- Investment opportunities: The additional monthly cash flow might be channeled into investment opportunities that could offer returns higher than the interest saved on a shorter-term mortgage.
While there are various reasons that might make refinancing to a 30-year term appealing, it’s crucial to evaluate the long-term implications. Extended mortgage durations mean prolonged debt, slower equity build-up and potentially higher overall interest paid. Homeowners should consult with financial advisors to ensure the decision aligns with their long-term financial strategy.
Are There Alternatives To 15-Year And 30-Year Mortgages?
While 15- and 30-year fixed-rate mortgages dominate the market due to their predictability and popularity, they’re not the sole options available to prospective homeowners. The mortgage landscape is diverse, offering various term lengths and adjustable-rate options to suit different financial scenarios and risk appetites.
20-Year, 25-Year or 40-Year Mortgage Terms
Beyond the standard 15-year and 30-year loans, mortgages can come in different term lengths like 20, 25 or even 40 years. These loans offer a unique blend of the features seen in their more common counterparts.
1. 20-Year Mortgage Term:
Benefits:
- Faster equity building: A shorter term than the 30-year mortgage means you’ll build equity at a more rapid pace.
- Less interest over time: You’ll pay off the loan quicker, leading to potential savings in interest.
- Potentially lower interest rates: Compared to 30-year terms, 20-year mortgages might offer slightly lower rates.
Drawbacks:
- Higher monthly payments: Monthly commitments are more than a 30-year term but less than a 15-year loan.
2. 25-Year Mortgage Term:
Benefits:
- Middle ground: Offers a balance between the 15- and 30-year terms, providing a compromise in monthly payments and total interest paid.
Drawbacks:
- Slightly higher payments than a 30-year: Payments will be more than a 30-year loan but less than a 20-year term.
3. 40-Year Mortgage Term:
Benefits:
- Lower monthly payments: By extending the loan term, monthly obligations are minimized, potentially offering the lowest monthly payments across the board.
- Increased borrowing capacity: The reduced monthly payment might allow some borrowers to qualify for a more substantial loan amount.
Drawbacks:
- Slow equity building: Home equity accumulates at a sluggish pace, making it less suitable for those wanting to build equity quickly.
- Potentially higher interest rates: Some lenders might offer higher rates for 40-year mortgages due to the extended risk.
When considering these alternative terms, it’s crucial to weigh the pros and cons in light of personal financial situations and long-term goals.
Adjustable-Rate Mortgages (ARM)
An adjustable-rate mortgage (ARM) offers a lower interest rate during an initial period, making the early stages of the loan more affordable. However, after this introductory phase, the rate can fluctuate, potentially increasing based on market conditions. For individuals confident they won’t reside in the property longer than this initial period, an ARM can provide substantial savings. However, if plans change, the potential rate hikes could affect affordability in the loan’s later years.
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15-Year Vs. 30-Year Mortgage: FAQs
Choosing between a 15-year and a 30-year mortgage raises many questions. Let’s tackle the most common questions to guide your decision-making.
Can I pay off my 30-year mortgage in less time without refinancing?
Yes! Here are three ways:
- Mortgage recast: By making a significant lump sum payment toward your loan’s balance, like from an inheritance or property sale proceeds, you can lower your monthly payment without altering the interest rate or term. Ensure you check with your lender for eligibility and potential fees.
- Additional payments: Amplify your savings by making extra payments on your mortgage. This method aids in paying off the loan faster and curbing the total interest. Ensure you notify your lender about the intention behind the extra payment, emphasizing its application to the principal balance.
- Biweekly payments: Split your monthly mortgage payment in half and pay that amount every 2 weeks. For instance, if your monthly payment is $1,600, pay $800 biweekly. This approach equates to 13 full mortgage payments annually, allowing you to chip away at your balance more efficiently.
Check with your lender to ensure there are no fees or penalties associated with paying off your mortgage earlier than the stated term.
I can’t make the payments on a 15-year mortgage. Should I switch to a 30-year mortgage?
If you’re struggling with the higher monthly payments of a 15-year mortgage, considering a switch to a 30-year term might alleviate some financial pressure.
Another option is a rate and term refinance that replaces your current loan with one that has more favorable terms. For instance, if you have a high interest rate and rates are much lower than what you have, you could refinance to get the lower rate. This process also allows you to adjust the term of your loan, potentially converting from a 15-year to a 30-year. However, be cautious: while this will lower your monthly payments, it may increase the total interest paid over the life of the loan.
Do I still owe money after I pay off my mortgage?
Once your mortgage is paid off, you indeed own your home outright, regardless of the term length. However, it’s important to remember that homeownership comes with other ongoing expenses. Even after the mortgage is settled, you remain responsible for annual property taxes, homeowner’s insurance and, if applicable, homeowners association (HOA) fees. These costs persist as long as you own the property.
The Bottom Line: Is A 15-Year Or 30-Year Mortgage Right For You?
Whether you’re getting a loan for the first time or trying to save on monthly payments, there is a loan option out there for you. 15-year loans are great options for borrowers looking to build home equity fast and own their homes more quickly while 30-year loans might be a better choice for those looking to pay off their house at their own pace while building wealth to save for other things.
Ranyah Bullock
Ranyah Bullock is a writer earning her bachelor's degree in mass communications at Delaware State University. Parallel to her studies and professional responsibilities, Ranyah contributes to the youth organization Midnight Golf Program.
