How To Decide Whether To Apply For A 15-Year or A 30-Year Mortgage

The vast majority of people who borrow money to fund their house purchases still opt for traditional 30-year mortgages. But an increasing number of borrowers are choosing 15-year mortgages, which generally carry lower interest rates but have higher monthly payments. They believe such mortgages will save them a considerable amount of money over the long term.

Deciding which the better choice is depends to a large degree on the personal financial situation of each borrower. Income level, amount of debt, and age all are factors that need to be taken into account. One form of mortgage is not better than the other for everyone, but one form might work better for you.

To assist you to decide on a mortgage, here’s a look at each type of loan and its benefits and drawbacks.

Mortgage

Affordability

A 30-year mortgage is usually more affordable in terms of monthly payments, which are stretched over 30 rather than 15 years.

For example:

A 30-year mortgage would cost about $880 a month if you buy a house for $250,000 and you put $50,000 down at an interest rate of 3.3 percent, including insurance and taxes.

A 15-year mortgage would cost around $1,354 a month for the same house at an interest rate of 2.72 percent.

For a loan of $300,00 with $60,000 down, a 30-year mortgage would run at about $1,423 a month at an interest rate of 3.3 percent; a 15-year loan $1,981 at 2.6 percent.

To determine the figures in your own case, check out this calculator.

If your personal budget is tight, therefore, it makes sense to opt for a 30-year mortgage.

But affordability is not the only factor to consider.

Pay Off Mortgage Early

A 15-year loan offers a major benefit when it comes to paying off the mortgage early.

The reason: The balance owing on the loan drops at a much faster rate than that on a 30-year mortgage. As a result, you can achieve the goal of a debt-free house much faster.

If you are aged, say, around 50 now, you will have paid off your house when you reach 65, meaning you will then have no monthly home payments. But if you have a 30-year loan, you will be paying the monthly payments until you are 80.

Investments

Some buyers might want to put money into other investments while they are working. Such moves as maxing out retirement savings and building up a savings account for emergencies might be possible for someone with the lower monthly payments offered by a 30-year mortgage, but might be out of range for a person paying a 15-year mortgage.

Here it is up to each individual to decide whether saving now is better than having no house payments in retirement. Of course, age and length to retirement are major considerations.

Length in Home

Another factor is that people tend to stay in their homes today for a shorter time than the historical average. Families now tend to move every five to seven years. Paying off a 30-year mortgage means that only a relatively small amount of the monthly payments in the first few years go to paying down the capital. The bulk of payments goes to interest.

By the time you have lived in the house for, say, five years you will find that the amount on the capital still owing on the house has not dropped as much as you might have hoped.

In contrast, the capital amount on a 15-year loan will have dropped far more, opening up the opportunity to making more money when selling the house and therefore being able to afford a more expensive house should you want to buy again.

Loan Eligibility

Buyers’ eligibility to buy a property will be based on the monthly payment. Because payments on a 30-year mortgage will be considerably lower than on a 15-year mortgage, the difference will determine whether they can obtain the loan or not.

But those buyers who are more conservative in their approach and buy a house that they can comfortably afford will still qualify for a loan on the higher payments required by a 15-year mortgage.

Here’s an article that might help to determine how much mortgage you can afford.

Job Stability

It is worth taking account, too, what will happen if you lose your job. Consider how soon you will be able to obtain another job paying the same amount of money and benefits as the one you have now.

If you are paying the lower payments on a 30-year loan you might be able to survive better than were you to be saddled with a 15-year loan. And, of course, refinancing at that stage to the lower payments is unlikely as, without a steady income, you might not qualify.

Tax Deductions

A 15-year mortgage means lower amounts in tax deductions over time. As more of the monthly payment is devoted to capital, the interest paid on the loan will decline, meaning that in the later years the tax benefits of deductions on the interest paid will be less. Someone who has considerable assets in retirement might welcome the tax deductions offered by a 30-year loan.

Do Your Own Calculations

In the final assessment, the person best equipped to determine which the best mortgage is for you is you. These considerations should go a long way in helping you to make that decision.