Is A 30 Year Or 15 Year Mortgage Really Best?
Is a 15 or 30 year mortgage the best choice?
There are a number of term options available to borrowers seeking both purchase mortgages and refinance loans today. There are 30 and 15 year mortgage loans, and even 20, and sometimes 10 year mortgages. So what’s the difference, and what quirks might mean the best option for you isn’t what you think?
The Lure of the 15 Yr Fixed Mortgage Rates
15 year fixed rate mortgage loans have often been a common selection of more financially set borrowers. A 15 year home loan obviously means paying off your home in half the time of a 30 year loan. That means no long term debt. Becoming free of housing payments ahead of retirement, and not leaving a family home encumbered by date to heirs.
However, the biggest lure of 15 yr fixed mortgage rate loans is often lower interest rates. Shorter loan terms can be seen as less risky to lenders as there is less time during which circumstances can change. This is generally rewarded with lower interest rates. There are other options such as 25, 20, and even 10 year loans, but the variances in rates are often negligible compared to the contrast between 15 and 30 yr fixed mortgage rate loans.
The combination of few years paying interest, and lower interest rates can mean significantly lower interest paid over the life of a loan. For example; the difference in lifetime interest between a 15 year loan at 3.15% and a 30 year at 4.15% for a $350,000 loan is $172,864.
The Advantages of a 30 Yr Fixed Mortgage Rate
So if there is so much to be saved by taking a shorter term loan then why do 30 year mortgages appear to be the most popular option?
Besides generally being the default option offered to borrowers the 30 year home loan enables home buyers and those considering refinancing to borrow more money. Even with slightly higher rates, with payments spread out over twice the time, the monthly obligation is much lower. In the above example; the 30 year fixed mortgage rate would require $741 dollars less each month ($1,701 per month versus $2,442 per month). That means home buyers can buy more house for less money out of pocket each month, or tap more equity and cash if refinancing.
It is also possible for 30 year borrowers to pay off their home mortgages as fast as 15 year borrowers if they apply additional amounts to pay down the balance each year. Bi-weekly payment plans can help too. This means less financial burden and pressure during leaner and tougher times, but the ability to pay down chunks of principal when flush.
The choice is really a personal one, but it’s good to know the pros and cons of both fixed mortgage rate options.