You have found the perfect house and now it is time to obtain financing. There are many choices when it comes to financing so it is always wise to understand the pros and cons of a 30-year mortgage versus a 15-year mortgage.
The Advantages and Disadvantages of a 30-Year Mortgage
A 30-year mortgage allows the mortgagor to keep their payments low. A borrower’s financial situation can change at any time. Keeping payments low will make it easier for the borrower to afford their mortgage payment even if their financial situation changes.
Another advantage to a 30-year mortgage is the ability to save money. Because the payments are low, borrowers can pay off other debts, make home improvements and put money in savings for unexpected expenditures.
The main disadvantage of a 30-year loan is that the borrower will pay more interest over the lifetime of a loan. When the payment is calculated, it will include interest that is paid monthly. This monthly interest will add up over the lifetime of a loan, costing the borrower more money over the life of the loan.
Another disadvantage of to a 30-year loan is a higher interest rate. Generally, the longer the term of the mortgage, the higher the APR. This means that the borrower will end up paying more in interest each month.
Finally, 30-year loans may not be the optimum choice for those who have children who will be starting college over the life of the loan or for people who plan to retire before the loan will be paid off.
The Advantages and Disadvantages of a 15-Year Mortgage
The main advantage of a 15-year loan is the borrower can pay off the mortgage in half the time of a traditional 30-year mortgage. This is especially advantageous to borrowers who will be retiring soon or those with children who will be attending college soon.
The borrower will pay thousands of dollars less on a 15-year loan. In some instances, this can mean tens of thousands of dollars in savings over the lifetime of the loan when compared to a 30-year loan.
The interest rate is generally lower on a shorter term loan. For example, the current interest rate, as of 2016 (http://www.bankrate.com/finance/mortgages/current-interest-rates.aspx), on a 15-year fixed rate is 2.89 percent while the interest rate on a 30-year mortgage is 3.63 percent. That is almost three-quarters of a percent lower, which can save a lot of money over the lifetime of a loan.
One of the disadvantages of a 15-year mortgage is a higher monthly payment. This can be an issue if the mortgagor’s financial situation changes. If the mortgagor loses his/her job, it can be more difficult to pay the mortgage payments.
Finally, because the amount of the mortgage is calculated on the borrower’s debt to income ratio, the amount of the loan that he or she qualifies for may be reduced. This can affect the quality of a home that the person will qualify for.
There are many things to consider when choosing between a 15-year mortgage and a 30-year mortgage. Many people think that the amount of the payments on a 15-year loan will be twice the amount of a 30-year loan. This is not true. If a borrower took out a 30-year mortgage for $200,000 with an interest rate of 4 percent, the payment would be $954.83. The payment amount on a 15-year mortgage with the same interest rate would be $1,479.38.
When deciding which mortgage is best, borrowers should consider their current financial situation as well as their long-term financial goals. Borrowers who prefer to minimize their payment and maximize their loan amount should opt for a 30-year mortgage. Those who wish to pay their mortgage off quickly and save on interest should opt for a 15-year mortgage.
Jeremy Johnson is a real estate enthusiast and has written content for dozens of real estate and related sites around the world. RealEstateCompanies.info is a side project he maintains because of his interest in real estate.