15 vs 30-Year Mortgage: Pros and Cons
July 6, 2020
What Is a Mortgage?
A mortgage is a type of term loan, one that is used securely by real property. In a term loan, the borrower pays interest calculated on an annual basis against the outstanding balance of the loan. In this case, both the interest rate and monthly payments are fixed.
There are two basic components to every fixed-rate mortgage loan: the principal and the interest.
- The principal is the amount you borrow to purchase your home.
- The interest is the amount you pay to compensate the lender for taking the risk of lending that money to you.
The monthly payment on a term loan is fixed. This means that the portion going towards paying interest and the portion going towards paying the principal changes over time. In the beginning, most of the loan payment is front-loaded to repay the interest of the loan. However, once the payment decreases the interest shares of the payment decreases, and the amount going to the principal increases.
Advantages of a 15-Year Mortgage?
They Have Lower Interest Rates than Most Mortgage Loans
More often than not, 15-year mortgage interest rates come with lower rates than a 30-year mortgage. You can usually get an interest rate from a quarter to half a percentage point lower than a 30-year mortgage. This happens because with a shorter loan there is less risk for the lender, with a longer loan, there is a higher risk that the loan will not be repaid.
They Cost Much Less than Other Mortgages
When we are deciding on a mortgage, our most common thought is “what will be our monthly payment?” but in reality, we should be asking ourselves “how much is the total cost of the loan?”. A 15-year mortgage has a higher monthly payment compared to a 30-year monthly payment, but when looking at the total cost of the loan the difference is crazy. For example, on a 250,000 loan you may save $452 monthly on a 30-year loan. However, the overall loan will end up costing you $97,000 more than a 15-year mortgage.
You Build Home Equity Faster
Home equity is what your house is worth minus how much you owe on it. The way you can build equity is through paying down the principle of the loan. The ultimate goal as a homeowner is to have more of your monthly payment to go towards the principal, not the interest of your home. With a 15-year mortgage, you can pay more towards the principal from the first monthly payment. Comparatively, in a 30-year loan, you will pay more interest annually, for the first several years of the loan therefore, you are building equity at a much slower rate.
Having more equity is an additional benefit because it can offer you a line of credit. This will give you more financial flexibility and is a good alternative to higher rate forms of debt.
You Pay off Your Home Quicker
Paying off a house in 15 years removes what’s the largest monthly household budget in half the time. Overall, a 30-year mortgage will leave you in debt 15 years longer, tying more of your life to the bank.
Disadvantages of a 15-year mortgage?
You Have a Higher Monthly Payment
The higher monthly payment may be too much for many people’s budgets. For example, not including taxes and insurance, in January of 2020, you would pay approximately $1,411 per month for a 15-year, $200,000 loan. The same loan over 30 years would be $898 per month. That’s a difference of $513 per month!
There’s more flexibility with a 30-year mortgage. You can treat it as if it were a 15-year mortgage by paying twice as much every month, with the extra going to reduce the principal. But when money’s tight, you can go back to the lower 30-year payment.
Advantages of a 30-Year Mortgage?
Low Monthly Payments
A 30-year mortgage offers the lowest monthly payment among traditional fixed-rate mortgages. Repaying a mortgage over 30 years, compared to a 15-year mortgage, means you will have a lower, more affordable payment. If you are not in a position where you can afford a high payment, a 30-year mortgage might be in your best interest.
Flexibility with Payments
With a lower payment, you have more flexibility in unpredictable circumstances. If you run into financial trouble, such as a layoff, you will have less trouble paying your monthly mortgage, because your monthly bill is low. Additionally, if your household income grows, you can make larger or extra payments. By making larger payments, you will be able to reduce the length of the mortgage and lower your total interest.
Predictable Payments Each Month
A lower predictable payment also means a little more wiggle room each month. When monthly revenue is going well, you can focus your monthly budget on other priorities. Getting a head start saving for emergencies, retirement, and college tuition. This also means that you have more income to devote to fun activities, such as home renovations or family vacations.
Low Rates Are Locked in for 30 Years
During an economic buyers’ market, you can be fortunate enough to get a lower mortgage rate. If you do receive a low mortgage rate, that rate is fixed for the life of that loan. The economy can fluctuate in the future, but you will not be impacted if the economy changes and interest rates increase.
With a lower payment, you can qualify for a larger loan amount and a pricer home. Imagine getting the house of your dreams without having to break the bank every month.
Disadvantages of a 30-Year Mortgage?
Higher Interest Rate
As previously stated, the length of the loan will impact the interest rate. The longer the length of a loan is, the higher risk the lender is at to be repaid. With the risk being higher, it is customarily that interest rates tend to be a quarter to a half-point higher than a 15-year mortgage.
More Total Interest Paid
With a higher interest rate over a longer period, it is not shocking to know that a borrower with a 30-year mortgage pays more interest than those with a 15-year loan. However, do you know about how much more interesting it is? On average, assuming both loans are paid according to schedule for their allotted time, the owner with a 30-year mortgage will pay about 60% more than those with a 15-year mortgage.
Slow Growth in Equity
On average, during a 30-year mortgage, the first 10 years of payments go toward interest. This implies that homeowners with a 30-year mortgage take a longer time to build equity compared to 15-year mortgages.
More Expensive Upkeep
With a longer-term loan, you can qualify for more money. Because you are qualifying for more houses you are tempted to push your financial budget. However, if you go for the pricier house, you’re likely to encounter a higher property tax bill. Additionally, if the more expensive home is not in a desirable location, but it’s larger, you’re looking at higher maintenance and, likely, utility costs.
Trust The Mortgage Firm To Help With Your Mortgage
Many homebuyers are torn between the benefits of a 30-year and a 15-year mortgage. The benefits of a lower payment with a 30-year mortgage or the interest saving benefit a 15-year mortgage can be a headache. Contact The Mortgage Firm Gainesville so their experienced loan officers can save you the headache of breaking down costs yourself.