15-Year vs. 30-Year Mortgages

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The growing variation in mortgages is making it possible for home buyers to customize loans to suit their needs. With greater opportunities, however, comes confusion.  A question that often arises is what type of mortgage is better – a 15-year or a 30-year?

With a 15-year mortgage loan, the interest rate is usually lower than a 30-year mortgage. The advantage of a 15-year loan is that it allows you to build equity (the portion of your home that you own without debt) faster, and it also lowers the amount of interest paid over the loan term. However, 15-year mortgage loans do have a higher monthly payment.   Most people opt for 30-year mortgages because they need to spread loan payments over the longer time period to afford them.

The difference in payments and overall savings between a 15-year fixed-rate loan and a 30-year fixed-rate loan depends on the interest rate and the loan amount. Using a $100,000 loan and 7.25% interest rate as an example, monthly payments on the 15-year note would be $912.86. Monthly payments on a $100,000 loan at 7.25% fixed for 30 years would be $682.18.

The 15-year mortgage offers the opportunity to save considerable money over the life of the loan, since the period of amortization is half that of the 30-year note. This means that the total interest paid on a 15-year mortgage as compared to a 30-year mortgage is significantly less.

However, calculating the overall savings of the 15-year mortgage over the 30-year mortgage depends on several individual circumstances, such as the borrower’s changing income status. 

Even if you qualify for a 15-year mortgage that you can pay off faster, you risk locking yourself into higher monthly payments. If your finances worsen or your property declines in value, you may fall behind in payments and have trouble qualifying for a refinance.

If you’re buying a home to live in for at least 20 years, get a 15-year fixed-rate mortgage. You’ll save an average of one-half point on the interest rate. By paying a few hundred dollars more per month, you could save more than $100,000 on finance charges over 30 years.

If you’re stretching a bit to buy the home, get a 30-year mortgage. If your circumstances improve, consider prepaying it so you’ll discharge the debt in 15 or 20 years. Some loans have prepayment penalties, so be make sure that your particular loan does not.

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