With an overwhelming number of mortgage options available, most homebuyers often turn to a 30-year fixed rate mortgage. Deemed the “apple pie” of home loans, it’s the path that most have taken during the route to at least their first home buying experience.

According to Freddie Mac, 90% of home buyers chose a 30 year fixed-rate mortgage in 2017. Would any of those buyers have benefited had they opted for a 15-year fixed rate mortgage instead?

Although the loans are structured very similar, the main difference is just as you thought-the terms. With a 15-year mortgage, you’ll more than likely have a higher monthly payment which to some may make this option less affordable. The shorter term however, could make the loan less expensive in the long run as a 30-year mortgage could end up costing home buyers nearly double. If monthly payment is your biggest concern, a 30-year mortgage would be a better option. Due to the length of the term, buyers often pay less each month with this option.

How does the term really affect the cost?

30-Year Mortgage

In the course of a 30-year loan, as you would expect-the principal balance decreases at a very slow rate. Borrowers are taking the same amount of money in their home loan, just paying back that amount for twice as long. The higher the interest rate, the higher the gap will be between the two term limits.

The biggest advantage of a 30-year mortgage is what could be a lower monthly payment. A few other benefits to include:

  • Affordability: A lower monthly payment may lend a borrower to expand their total budget during their home search.
  • Savings: A lower monthly payment could allow the borrower to build up their savings.
  • Availability of funds: A lower monthly payment may free up a bit of money to put towards other debts or use at your leisure.

15-Year Mortgage

15-year loans tend to be a bit less risky as a 30-year loan typically comes with a higher interest rate. Over the life of the loan, borrowers could pay anywhere from a quarter to a full percent less and over the years that could really add up.

If paying off your mortgage efficiently and possibly at a younger age, then a 15-year term is could be the right fit. Not only is the loan paid off sooner, but a few more advantages come along with it:

  • Interest Rate: Borrowers will likely get a lower interest rate and pay less interest over the life of the loan.
  • Equity: A higher monthly payment means you’ll be building up the equity in your home at a quicker rate.
  • Save Money: Borrowers may pay more on a monthly basis, but with a 15 year term and possibly lower interest rate, you’ll be paying interest for half the years. This could lead to exponential savings for you.

What option is right for you?

There are advantages and disadvantages to both 15 year and 30 year home loans. While 15 year loans may have a lower interest rate and could be paid off sooner, they often carry higher monthly payments. And 30 year loans often come with a lower monthly payment due to the extended term, you’ll likely pay much more interest on your loan.

This is where it comes down to what you can afford. Don’t over extend yourself and your financial situation in hopes of paying off your home sooner. However, if you do have a few extra bucks each month-you may want to put it towards your mortgage. This may seem like a small step for such a big loan, but in the end-the sooner you are able to pay it off, the sooner you’ll be mortgage free.

Contact our Mortgage Team today and let them do the Mortgage Math for you.

Conventional 30 year loan based on $200,000 loan, 20% of down payment, Adjusted origination fee of $2000 with 360 payments of $1370, 3.990% Interest Rate, 4.157% Annual Percentage Rate. Other Fees may apply, estimated taxes and insurance are included. Actual payments may be greater. All credit and loan products are subject to credit approval. Interest rate and Annual Percentage Rate is effective as of 06-14-19. Rates subject to change daily. This is not an offer of credit or commitment to lend. Financing shown for illustrative purposes only.

Conventional 15 year loan based on $200,000 loan, 20% of down payment, Adjusted origination fee of $2000 with 180 payments of $1809, 3.125% Interest Rate, 3.405% Annual Percentage Rate. Other Fees may apply, estimated taxes and insurance are included. Actual payments may be greater. All credit and loan products are subject to credit approval. Interest rate and Annual Percentage Rate is effective as of 06-14-19. Rates subject to change daily. This is not an offer of credit or commitment to lend. Financing shown for illustrative purposes only.

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