15 vs 30 Year Mortgage
Getting your first mortgage is certainly an exciting time in your life, but it does come with significant stress for most people. Mortgage rates, the length of the loan, and your down payment will all impact your monthly cost and how much interest you will end up paying. The 15 vs 30-year mortgage is highly debated among financial advisors, some recommending nothing more than a 15-year mortgage and some recommending a 30-year mortgage for more flexibility. We’ll give you our thoughts on this debate below.
Types of Mortgages
There are a few main common types of mortgages. The most common is a 30-year fixed-rate mortgage. This type of mortgage, as you guessed, matures in thirty years and has one fixed rate that will not change.
Another option you can choose is a 30-year adjustable-rate mortgage. You might hear them referred to as an ARM mortgage. With this type of mortgage, your rate will change based on market conditions. There are different types of ARMs that specify when the rate could change. For example, a 7/1 ARM means that your interest rate will remain fixed for the first seven years, then it can change based on market conditions once per year. There are limits to how much your rate can change as well. These limits will be specified in your mortgage documents.
And lastly, the 15-year fixed-rate mortgage, which is structurally the same as a 30-year fixed-rate mortgage other than the length of the loan. A 15-year mortgage will save you money on interest, although your monthly payments will be higher.
Which one is right for me?
When comparing mortgages, it’s important to understand a few different things about your unique situation first so that you can make the best decision.
- Your income
- How long you plan to live at that home
- Your financial goals
Do you predict your income changing in the next few years? This is something you should keep in mind when shopping for your mortgage. If you think your income will rise, (perhaps through a promotion or job change) an ARM might be the right option for you. If you think your income will remain steady, a fixed-rate mortgage is probably a better option to protect yourself from an increase in your payment.
It also depends on how long you plan to keep the home. If you think you will own the home for less than five years, an ARM might be a better option. If you plan to own the home for more than 10 years, a 30 year fixed rate might be your best bet.
Your financial goals will also help you to determine which mortgage you choose. If your goal is to lower your overall interest paid, a 15 year fixed rate mortgage is your best option. If you prefer to live more comfortably, a 30 year fixed rate mortgage will offer lower monthly payments allowing you to spend that money elsewhere.
15 vs 30 Year Fixed Rate Mortgages
Like we mentioned before, a 15 and 30-year fixed-rate mortgages are structurally the same. The way interest is calculated is the same, the only difference being the life of the loan. When choosing between the two, there are a few questions you should also yourself.
How disciplined am I financially?
If you chose a 30-year mortgage and pay it off in fifteen years and assume the interest rate is the exact same, your total interest paid would be similar. Depending on how disciplined you are financially, it might be a good idea to get a 30-year fixed and pay it off early. If you aren’t disciplined, you could commit to a 15-year in order to force yourself to pay that amount. This will force you to live more frugally but is worth it in the long run.
Can I afford a 15-year payment?
15-year mortgages will have higher payments than 30-year mortgages. Usually about 50% higher. If you can comfortably afford this payment, we’d highly recommend it to save on your interest paid. If you can’t afford it you have a few options. You could go for a 30-year mortgage and pay extra monthly to lower your interest paid. You could purchase a lower-priced home to have a lower 15-year payment. Or you could increase your down payment on the home and opt for the 15-year mortgage.
How much flexibility do I need?
Because a 15-year mortgage has higher payments, you won’t have as much flexibility with your finances. If something were to go wrong, you might find yourself in trouble with a 15-year mortgage. By selecting the lower cost 30-year mortgage, you will have a lower payment giving you more flexibility if something goes wrong.
Whether you choose a 15-year mortgage or pay extra on a 30-year mortgage, you will lower your overall interest paid, leaving more money in your pocket when the loan is paid in full. Depending on your individual situation, either way, could be beneficial for you. By understanding your income, financial goals, and needs you should be able to determine which mortgage is right for you.