Compare 15-year vs 30-year Mortgage
Introduction 15-year vs 30-year Mortgage (Pros and Cons)
Buying a home is the biggest purchase you are ever going to make in your lifetime. So it depends on what kind of mortgage you get. The ideal situation is to pay for a home in cash, but a lot of people don’t have that kind of money lying around. Hence, people opt for a mortgage which is a loan against your home, using your home as collateral
If a borrower is unable to pay the mortgage, banks have the right to foreclose the house which is kept as collateral. 30-years mortgages are the most common with about two-thirds of applications being for 30-years mortgages.
Upon final closing, the statistics show that the 30-years mortgages are used 86 percent of the time by the borrowers. Whereas 15-years mortgages might sound an odd choice because 30-years mortgages are more popular. Let us learn the pros and cons of 15-year vs 30-year mortgages.
15-year Mortgage Pros
1-Interest Rate:
The interest rate on a 15-years mortgage is lower than 30-years one. The reason for this is 15-years is less risky of a loan compared to 30-years. It is less risky for a lender because the term is shorter.
If the term is more concise, there is a high possibility for fewer things that can happen to you like job loss, sickness, etc. So a shorter termed mortgage (15-years) is looked at as less risky to the banks and lenders. The interest rates are also typically 0.25% to 1% lower than a 30-years mortgage.
2-Quicker Payoff:
Since the tenure for a 15-years mortgage is short compared to a 30-years loan; a borrower can pay off the mortgage for the same house in half the time. If budget is not a constraint for you, making an additional payment towards your principal every month may help you to pay off the loan way before 15-years.
3-Faster Principal Paydown:
The principal of the loan is the amount that you borrow, and your lender or bank will charge interest on top of the principal amount. There are two parts to your mortgage — the principal and the interest. With a 15-years mortgage, more of your monthly payments go towards principal paydown, which means you are paying off the loan faster as opposed to a 30-years loan.
15-year Mortgage Cons
1-Higher Monthly Payment:
The one most significant con of choosing a 15-years mortgage has a higher payment every month. So it just makes logical sense, if you are getting a mortgage and paying it off in 15-years instead of 30-years, your monthly payments would be higher because you are paying off the same loan amount in less time.
2-Money is locked
Using most of your money for quick mortgage repayments could lead to it not being available for other investments a higher return on stock investments.
30-year Mortgage Pros
1-Lower Monthly Payment:
Because of the outstretched tenure, the payments on a 30-years mortgage are more economical compared to a 15-years mortgage. The lower payments allow you to purchase a home that you can initially afford compared to a 15-year mortgage because your payments are stretched out over 30-years.
2-Extra Funds For Investing:
This also frees up more funds for additional investments. As long as you are earning more interest in your investments than what the interest is on your mortgage, it means you are netting a positive return.
For Example, if your interest rate on the mortgage is at 4 percent and the interest that you are getting on your investment is 6 percent. There is a difference of 2 percent that you are netting throughout that 30-years.
30-year Mortgage Cons
1-More extended Payoff Period:
Since the tenure is stretched to 30-years, it takes a longer time to pay off the loan. It is 15-years more that you continue to pay the mortgage when compared to a 15-years mortgage. Due to this, it may be possible that you are still paying until the time of your retirement.
Anyone would like to pay off the mortgage before retirement as after retirement the mortgage payment may be one of the most significant parts of your expense.
2-Slow Principal Paydown:
In the case of a 30-years mortgage, the majority of your payment for the initial years goes towards interest part of your mortgage. Because of this, you are not building enough equity in this process.
Conclusion
There are definite advantages to both 15-year and 30-year mortgages. But keep in mind, it is called personal finance for a reason. There is no one size fits all. Personal finance should be particular to your life and life situations.
Talking to your trusted loan officer might give you more information on which one suits best according to your situation.
References: https://www.compareclosing.com/blog/15-year-vs-30-year-mortgage
