Confused between a 15 Year and a 30 Year Mortgage?

According to a report by the Mortgage Banker’s Association, most Americans opt for a 30 year fixed mortgage when choosing between home loans with different term lengths. While the 30 year mortgage has been the American archetype for several years, the 15 year mortgage option should not be overlooked.  Depending on the individual’s financial situation and long term goals, the 15 year mortgage may have benefits that far outweigh its 30 year counterpart. To help homebuyers choose between a 30 year and a 15 year mortgage, we list the benefits of both.

Advantages of a 15 Year Mortgage

While a shorter-term requires home loan borrowers to pay a higher monthly mortgage payment, it makes the loan cheaper and has several other benefits such as:

1. Quick Repayment

Paying mortgage payments for a long period of time can not only be frustrating for some, but it can also affect their eligibility for a second loan. Lenders offer lower loan amounts to borrowers who already have an existing mortgage, as their existing loan lowers their repayment capacity. So, if you are young, can easily afford to pay higher installments and are planning to take a second loan after a few years, opting for a 15 year mortgage would be a good idea.  Not to mention the euphoria of being debt free - well at least mortgage debt.

2. Interest Savings

Home loan borrowers can make substantial savings by choosing a 15 year mortgage over a 30 year mortgage. In fact, a lot of lenders offer significantly lower interest rates on loans with shorter loan periods as they are considered less risky.  In addition to the lower interest rates, a 15 year mortgage has significantly less interest costs over the life of the loan than a 30 year mortgage.  The savings can be substantial.

3. Faster Equity Build-up

The difference between the current market price of the property for which the loan was borrowed and the amount the borrower owes to the lender is known as equity. As one pays off their mortgage loan faster in a 15 year mortgage, it helps them build equity faster.

Advantages of a 30 Year Mortgage

Though a 30-year mortgage is more expensive in the long run than a 15-year mortgage, it’s a blessing for those who cannot afford a high monthly payment. Here are some of the other advantages it offers:

1. Lower Monthly Installments

The biggest advantages of a 30 year mortgage is its relatively low monthly installment. The installment for a 30 year mortgage is around one third less than a 15 year mortgage installment. The savings may help borrowers save for other goals such as their children’s education, saving for their retirement, and other opportunities. A savvy investor may even go on to invest the difference in high-yielding bonds, or additional real estate.

2. Flexibility

A borrower with a 30 year mortgage has the flexibility to pay off their loan earlier than the committed period, if they so desire. If their lender allows (which they usually do), borrowers can increase their monthly installments or pay lump-sum amounts during the tenure of the loan. In case the situation gets tight, borrowers can fall back to the more comfortable payment established earlier.

Need Help?

If you need help or have any questions about what loan term you should choose, get in touch with one of our mortgage experts today.  You can also do you own comparison of the 15 year mortgage versus 30 year mortgage by using our comparison calculator.