15 vs. 30-year Mortgage: What to Know

When you’re applying for a home loan, you face the option of getting a 15 or a 30-year mortgage. It can be a daunting decision, and thinking about something 15 or 30 years down the road is overwhelming. There are pros and cons to both options, which are compared below.

The Basics

The basics of a 15-year mortgage include the fact that it’s going to be paid off faster and will probably have a lower interest rate. However, with a 30-year mortgage, you’re going to have lower monthly payments. So which is right for you?

The Pros and Cons of a 15-Year Mortgage

With a 15-year mortgage, you have a monthly payment and interest rate fixed for the life of your loan, as is the case with a 30-year mortgage. It’s an alternative to the 30-year mortgage, although that’s the more conventional option. With a 15-year mortgage, if you’re willing to deal with the possible downsides, it can ultimately save you a lot of money over the long-term.

The upsides of a 15-year mortgage include:

• As was touched on, a 15-year mortgage is cheaper in the long-run than a 30-year mortgage. The cost of a mortgage is based on the annual interest rate, and you’re only borrowing money for half as long with this option.
• Short-term loans are cheaper and are viewed as less risky by a lot of lenders, so they may offer a lower interest rate. Sometimes the rate difference can be anywhere from a quarter-point to an entire point when compared to a 30-year option.
• The Federal Housing Administration charges lower mortgage insurance premiums on 15-year loans.
• Some financial analysts and planners feel like a 15-year mortgage is a form of forced savings. Basically, you’re investing in a house instead of something like the stock market, but that house is likely to go up in value or appreciate.

What are the downsides of a 15-year mortgage on the other hand?

• You’re going to have a higher monthly payment when compared to a 30-year mortgage because you’re paying off your entire loan in half the time. You may not be able to afford this.
• If your aim is to get a 15-year mortgage, you may ultimately be able to afford less house because of the payments.
• If you’re making a higher house payment each month, you’re going to have less liquidity and cash reserves and less money to put toward savings or other investments.

Pros and Cons of a 30-Year Mortgage

So what about the up and downsides of a 30-year mortgage?

The upsides include:

• Your monthly payments are lower. This is essentially the biggest upside of a 30-year mortgage. You may have more flexibility in your budget with lower payments simply because you’re stretching your payments out over a longer period.
• You have some flexibility in how you repay a 30-year loan. For example, if the opportunity arises, you can pay more, but you don’t have to.
• You may qualify for a more expensive home, so your home may grow more with your needs over time.
• Tax laws let you deduct mortgage interest from your taxes. When you first get a home loan, most of your payments go toward interest, so that can be a substantial deduction.
• Since the payments are smaller, it’s easier to qualify for a 30-year mortgage.
• You have more money each month to put toward other goals, including saving and investing.

The cons of a 30-year mortgage include:

• Lenders tend to charge a higher interest rate on 30-year mortgages because they’re spreading their risk of you not repaying over a longer period of time.
• You’re going to pay much more in interest over the life of your loan.
• With a 30-year loan, you’re building equity in your home at a much slower pace.
• With a 30-year loan, you’re putting yourself more at risk of borrowing more than you can really afford.

Overall, you can see the pros and cons of each are significant. There’s no right answer as to which is the better option. It depends on your financial situation and your goals and priorities not only now but into the future.