15 year Mortgage vs 30 year

(There are so many mortgage products to choose from that it can be incredibly hard to decide which one is right for you, especially if you are a first time homeowner. )

Even if you have already purchased five homes, it can be difficult to choose a mortgage because new loans are always coming out, and financial situations are always changing.

Before we get in over our heads, it is easiest to start explaining the mortgage process with the most time-tested and traditional products, the 15- and 30-year mortgages.

There are benefits and disadvantages to both of these types of loans, and one may work perfect for one borrower, and is not a good fit for another.

A November 21, 2006 article by Mary Dalrymple of fool.com, “Mortgage Math,” looks into the intricacies to these two types of popular loans.

“There's a reason why mortgages come with 30-year terms (and occasionally even 40-year terms): because a house just isn't affordable without access to long-term credit.”

“What if you've been a homeowner for a while and you've built up some home equity? You may be older with more earning power than you had when you purchased your first home. Maybe you're thinking of refinancing, or you're considering moving. That's the time to weigh whether a 15-year mortgage might be a better choice for you. It's not always the best choice.”

The first thing to consider when deciding between these two types of mortgage products is the amount you will pay in interest. You will end up paying less interest over time with 15-year mortgage because the borrowing time is much shorter.

“For the sake of an example, consider the financing of a $200,000 mortgage at a 6.25% interest rate. If it's spread over 30 years, the homebuyer will pay $243,316 in interest. The same loan, spread over 15 years, will cost $108,672 in interest, or less than half.”

But instead of paying more mortgage interest like you would with a 30-year, your monthly payments will be much larger with a 15-year mortgage.

You should also carefully analyze your financial situation before deciding on one of these loans. If you want to give yourself ample financial breathing room, then the 30-year is probably your best option because you will have much smaller payments.

With this loan, you can always make payments as if you had a 15-year just so you have the security of falling back on the smaller 30-year payments should something come up financially that is unexpected.

“If you choose a 30-year mortgage, ask yourself what you'll do with the rest of the money that won't be going toward home payments. Your emergency fund may need an infusion. Or, if your retirement funds need some bolstering, it may be obvious that you need to put that extra money into your 401(k) or IRA accounts. You'll probably get tax benefits on top of the financial advantages of gaining more time to compound your investment earnings.”

“On the other hand, if you see retirement on the horizon, you might opt for a shorter mortgage. Who wants to be paying their mortgage out of their retirement funds?”

A 15-year mortgage can be a good option for those who think they will be moving quickly. A shorter loan will help to build up equity faster for a bigger down payment on a new home. “How a mortgage fits into your financial plan depends on you -- your goals, your plans, your spending habits, your financial personality. Ask yourself whether a 15-year or a 30-year mortgage will best make your dream come true.”

Back to Articles