Buying a home is probably one of the biggest purchases you will ever make in your life.
And for most of us, it definitely won’t be cheap.
This means that you maybe cash is not paid for a house these days, which means that additional costs such as interest and fees from the lender will further increase the total cost of buying your home (learn about all costs in our article: 10 costs to keep in mind when buying a home).
When dealing with such a large amount of money, it is more important than ever to choose the mortgage that makes the most financial sense to you.
Here is the difference between a 15 year mortgage and a 30 year mortgage.
Differences between 15 year mortgages and 30 year mortgages
Lenders allow you to choose the term of your home loan when applying for your mortgage, that is, the period of time during which you will pay off the balance.
The two most common options? Mortgages for 15 and 30 years. And bOther types of home loans address affordability in two different ways.
A 15-year mortgage costs you less in the long run because you pay your home in half the time. as with a 30-year mortgage.
In other words, you will pay interest for 15 smaller years. As you will see in a minute, this makes a lot of money.
Plus, interest rates on 15-year mortgages are usually lower than 30-year mortgages, which saves even more.
However, 30 year mortgages are more affordable in the short term. as they distribute your debt over a longer period of time.
A 30-year mortgage makes buying a home more affordable, even if you end up paying more interest than if you took out a 15-year mortgage.
Comparison of two mortgage terms
For this scenario, assume the home price is $ 340,000. Average Millennial Shopper Earns down payment about 8%so I also assume that the loan amount for this purchase is $ 312,800 (with an 8% down payment of just over $ 27,000).
This is where things start to diverge.
I will use two different interest rates for each loan term:
- 2.21% on a 15-year mortgage.
- 2.77% on a 30-year mortgage.
It might seem like all of these variables lead to a mathematical equation, but don’t worry. You can simply insert parts into the MU30. Simple mortgage calculator to quickly compare different mortgage terms.
Here’s what each mortgage looks like for our hypothetical home buyer.
| 15 year mortgage | 30 year mortgage | |
|---|---|---|
| Monthly payment (only principal and interest) | USD 2,043.28 | $ 1,280.29 |
| The total amount of interest paid during the term of the loan | US $ 54,991.22 | US $ 148 106.03 |
As you can see, A 30-year mortgage on the same home will cost $ 93,000 more than a 15-year mortgage. Butyour monthly mortgage payment will be nearly $ 800 less with a 30 year option is a big difference in your daily budget.
For many people, choosing a 30-year mortgage over a 15-year mortgage can be the difference between lending a home and continuing to lease.
When to consider a mortgage for 15 years
If your emergency savings are solid
Since you will be paying more on your mortgage each month, there will be less wiggle room in your budget to cover unexpected expenses.
Make sure you have at least three to six months of savings in your contingency fund in case you lose your job.
More details: 5 Ways to Quickly Launch Your Emergency Fund
If you can keep saving by covering your mortgage
A 15-year mortgage can be a smart monetary move, but not if it puts your short-term financial health at risk. Consider this option if you can comfortably afford the monthly payment without sacrificing your ability to save elsewhere, including retirement savings.
If you want to pay off your debt quickly
A 15 year mortgage can be a good option for people who are passionate about solving a debt problem quickly and aggressively. Over time, you will save a lot of money on interest and cut the loan term in half.
More details: Kick Debt On The Ass! How to get rid of debt on your own
Pros and cons of a 15 year mortgage
Pros:
- Over time, you will pay less for your home. KosT interest payments go down when you pay for less than 15 years.
- You will receive a lower interest rate. A 15-year mortgage has lower rates than a 30-year mortgage.
- You accumulate capital faster in your home. Most of your monthly payment goes to principal rather than interest. If you sell your house, you will get a lot more money.
- You can apply for home equity financing. If you stay at home, you can get access to home equity financing products if you have a large share of real estate ownership.
- You will get free of debt much faster. Not paying on your home can provide you with long-term financial security as you get older and retire because you don’t have to worry about paying off your mortgage.
Minuses:
- Your monthly mortgage payment will be higher. Increasing mortgage costs can affect other areas of your finances, such as savings.
- You may have difficulty obtaining other types of funding. Lenders always evaluate your debt to income ratio. The larger mortgage payment eats up a larger chunk of your monthly income. The lender may feel uncomfortable letting you exceed a certain amount of your car or individual loan debt.
When to Consider a 30 Year Mortgage
Now let’s talk about when a 30 year mortgage might be the best for you when buying a home.
If You Can’t Afford A 15 Year Mortgage Payment
In some cases, you may simply not be able to handle your 15-year monthly mortgage payment – and that’s okay! Avoid getting into financially dangerous situations.
If you prioritize other financial goals
We all have goals that require money in life, and home ownership is often just one of them. You can prioritize retirement savings, children’s future college spending, or simply create a large emergency savings fund.
A 30 year mortgage can help you achieve other financial goals, especially if you qualify for a low rate.
Pros and cons of a 30 year mortgage
Pros:
- You will have a lower monthly payment. This gives you more room in your budget to save on other things or deal with a financial emergency.
- You can choose a more expensive home. Mortgage proliferation can allow you to borrow more than you could afford with just a 15-year mortgage.
- It will also make it easier for you to qualify for other types of loans. A 30 year mortgage will lower your monthly debt to income ratio.
- You can shorten the maturity by making additional principal payments. This strategy cuts down on the time left on the mortgage. Adding additional mortgage payments of only the principal amount each quarter or year can significantly reduce the amount of interest you will be paying over time.
Minuses:
- You may not prioritize additional principal payments. While many homeowners think they will make these additional payments to lower their overall interest, it is easy to forget or spend that money elsewhere. As a result, it is likely that you will end up paying that extra interest over the years.
- You will still be paying your mortgage as you get older. If you buy a home when you are 30 years old, you will be charged up to 60 years old. Having received a home loan for 15 years, you will be freed from the mortgage by 45 years.
- It takes longer to build equity capital. Home loans are amortized, which means that your previous payments are pre-loaded and will have high interest rates. In fact, only a small fraction goes to your director’s account until later years.
If you’re not sure which type of mortgage is right for you, don’t be afraid to shop. You can find out how to do this by reading our article: How to choose the best mortgage for you…
