Although 30 year mortgages are more common than 15 year mortgages, the 15 year mortgage is a great option if you can afford higher monthly payments.
Have you decided to buy a new home? There are many different financing options to consider and the mortgage term, or the length of time you have to repay your loan, will be one of them. Many buyers will be faced with choosing a 15 year or a 30 year mortgage. A shorter-term loan means a higher monthly payment, which makes the 15 year mortgage seem less affordable. However, the shorter term actually makes the loan cheaper on several fronts. Below we compare the advantages and disadvantages of 15 year fixed-rate and 30 year fixed-rate mortgages.
A 15 Year Mortgage
Opting into a 15 year mortgage means that while the life of your loan will be half that of a 30 year mortgage, you will have considerably higher monthly payments. This is because the loan principal must be paid off faster, so each payment is larger. Here are a few advantages and disadvantages of opting into a 15 year term:
- Generally lower interest rates.
- Build home equity faster.
- The mortgage is paid off more quickly.
- Less interest paid overall.
- High payments can make saving for other long-term investments such as college tuition or retirement difficult.
- You’ll have less money to invest and diversify your portfolio with while paying back the loan.
- The higher monthly payment and lower savings account balance can put you at risk if you experience job loss or a traumatic event and do not have savings to pull from.
A 30 Year Mortgage
Deciding on a 30 year mortgage means you will be paying the mortgage over a longer period of time. This will give you access to more money each month as less will be allotted towards your mortgage payment. See below for a few advantages and disadvantages of a 30 year mortgage term.
- A lower monthly payment.
- Assuming there is no prepayment penalty, you can still make larger monthly payments to get the interest savings benefit of a 15 year mortgage.
- Since you are paying less each month, you’ll have extra cash to set aside for savings or investing elsewhere.
- Great option for younger borrowers who have time to pay off the mortgage before retirement.
- The longer term is not ideal if you’re near retirement and will be dependent on a fixed income.
- You’re doubling the life of your loan vs. if you took a 15 year mortgage.
- Your interest rate will be higher, since you are paying for the loan over a longer period of time which is more risk for the lender.