In this article we are going to explore the pros and cons of a 15-year mortgage versus a 30-year mortgage and help you determine which type of mortgage is right for you.
The Difference Between a 15-Year and 30-Year Mortgage
Here’s the biggest difference between a 15-year mortgage and a 30-year mortgage: You can pay off a 15-year mortgage in 15 years. A 30-year mortgage can be paid off in 30 years.
Duh, right? But there are other considerations when making your decision on which mortgage term to choose.
Some people are attracted to 15-year mortgages because it means there is a lower interest rate. Others prefer a 30-year mortgage as it means lower mortgage payments, making it easier to attain a loan.
Is a 15-Year Fixed Mortgage Right for You?
The lower interest rates of a 15-year fixed mortgage is very attractive. Not to mention, with a fixed-rate mortgage, you don't have to worry about your monthly payments changing. Even with market interest rates and inflation, your mortgage payments are the same.
However, there is a catch. Due to the fact that you are paying your mortgage in a shorter period of time, your monthly payments are going to be significantly higher than a 30-year mortgage. This higher bar makes it harder to qualify for this type of mortgage and may stretch your budget to a breaking point.
Is a 30-Year Fixed Mortgage Right for You?
Taking on a 30-year mortgage could mean a substantial tax deduction for your interest payments (but the trade-off is you will pay substantially more in interest over the years). This is especially true when you initially start paying your mortgage because most of your payment for the first several years goes towards paying down your interest. If you have a fixed-rate mortgage, then you will be paying the same amount each month (excluding taxes and insurance, which may fluctuate).
If you are planning to move in a few years, or you don't want to pay a lot in interest, choosing a 15-year fixed-rate or adjustable-rate mortgage may be a better choice.
For home buyers that can afford to pay a higher rate and want to pay off their mortgage quicker than a traditional loan, the 15-year mortgage is perfect for them. You can save thousands in interest payments.
In order to afford a 15-year mortgage, you need income that is reliable. You also need enough money to cover expenses as well as emergencies and savings.
What Does a 15-Year Mortgage Entail?
If you make your payments on time, you can pay off a 16-year mortgage in 15 years. 15-year mortgages usually have a fixed rate. This means your monthly payments remain the same throughout the life of the loan. However, your insurance and taxes are subject to change.
The Home Mortgage Disclosure data found that 22 times more homes were purchased through a 30-year mortgage than a 15-year one back in 2018. 3.6 million of single family homes were purchased through 30-year mortgages while only 165,000 were purchased through 15-year mortgages.
Most borrowers avoid 15-year mortgages because the monthly payments are usually almost double the amount of a conventional loan.
Pros of a 15-Year Mortgage
A Faster Way to Build Home Equity
When you have a 15-year mortgage, not only are you paying a higher monthly payment, but your interest rate is lower. This means you are paying off the principal faster and building equity in the home faster.
Own Your Home Free and Clear Quicker
Most people have the goal of owning their home free and clear. The peace of mind that comes with having a home that is completely paid off is unbeatable.
Save Long-Term in Interest
Lenders will usually charge less in interest because they experience less risk as a result of the shorter period of the mortgage. Due to the fact that the loan is only 15 years, you are only paying half the amount of interest you would pay in a traditional loan.
Cons of a 15-year Mortgage
Higher Monthly Payments
The monthly payments of a 15-year mortgage are about 50% higher than a 30-year mortgage. On top of that, you still have to pay insurance and property taxes. Not to mention, if your down payment is less than 20%, you also have to pay mortgage insurance. This can make it hard to put aside money for emergencies. Although it may seem possible to cover high monthly payments, things happen and a mortgage is a big commitment. You can only get out of it if you refinance, sell, or your home goes in foreclosure.
You May be Missing Out on Other Investments
Paying higher principal and interest payments means that you are unable to put more money into your retirement account or renovate your home. You may also be missing out investing in the stock market or acquiring other assets.
You May be Restricting Your Housing Options
The high payments that are required for a 15-year mortgage may mean that you can only qualify for a smaller loan. This could mean that you have to settle for a home that is smaller than you wanted or move to a location that you aren’t keen on. A loan that has a longer life lowers your monthly payments and gives you more options for selecting a home.
What Does a 30-Year Mortgage Entail?
A 30-year mortgage involves paying a home loan within 30 years provided all the payments are made on time. As the majority of 30-year mortgages have a fixed rate, your monthly payments should stay the same throughout the life of the loan.
Pros of a 30-Year Mortgage
Lower Monthly Payments
The repayment period of a traditional mortgage is so long that the monthly payments are affordable. This makes it easier to qualify for a home loan.
Allows for Flexibility
The great thing about a traditional mortgage is you have the option of paying down the loan faster by paying more money each month or paying extra payments. Also, when things get tough, you can fall back on the lower payments.
Due to the fact that most 30-year mortgages have a fixed rate, your principal and interest rate payments will remain the same regardless of what the economy is doing. As market interest rates climb, you won't have to worry.
With lower monthly payments, you have more options for the kind of house you can qualify for. That means you can go for a bigger house. It is also possible to go for a home in your dream neighborhood.
A Larger Tax Deduction
The tax laws in America allow homeowners to deduct their mortgage interest from taxes. The first few years of your home loan, most of the monthly payments you are making go towards paying down on interest. This means you are getting larger tax deductions than you would from a 15-year mortgage.
Qualification is Easier
Due to the smaller payments of a traditional mortgage, qualifying for a loan is much easier than a 15-year mortgage. As a result, more borrowers can purchase a home.
Due to the lower monthly payments compared to a 15-year mortgage, a 30-year mortgage gives you the freedom to use the extra money you have to take on other projects like a home renovation. You also can use the money to invest in stocks or put more towards your retirement.
Cons of a 30-year Mortgage
Higher Interest Rates
Lenders are taking on risk when they are offering a long-term loan. As a result, they charge higher interest rates for a 30-year loan over a 15-year loan. This means the purchase of your home will be much more expensive than a loan paid over a shorter period of time.
Growing Equity at a Slower Pace
With a traditional loan, you are building equity in your home at a slower pace. This is because you are paying more in interest. Also, most of your payments are going towards interest in the early years of your home loan.
Risk of Biting More than You can Chew
Sometimes, being able to qualify for a more expensive home comes with its pitfalls. You may go for a home that is so expensive, you can't save for emergencies.
Bigger House Means Bigger Costs
Pricier homes tend to have higher costs like property taxes, utilities, and upkeep of the property. You should budget between 1% and 2% for upkeep costs when factoring the kind of house you can afford.
The Wrap Up
There are some benefits that come with a 30 year mortgage. Being able to afford the home you want for affordable monthly payments is appealing to most people. Not to mention, the tax deductions that come with it.
Those that can afford a 15 year mortgage enjoy the feeling of not having massive debt hanging over their head for many years. They also like the idea of paying a lower interest. Regardless of what your goal is, you can find there are pros and cons to each type of mortgage. In the end, you have to pick the right one for you. If you are looking for a home in the Boise real estate market, please reach out to our team and let us see what we can do for you.
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