Which is the best option, 15 or 30-years fixed mortgage rate?
The 30-year mortgage has long been the norm of the industry and for that reason; home buyers generally go for it as it gives them the chance to get the loan spread out over a long period so payment can be as low as possible. That was at first, interest rates have recently dropped to near-record lows, and homebuyers are now going for the 15-year mortgage as they become more popular over time.
Some buyers would consider the 15-year mortgage to be a dream home loan option if they can afford much higher monthly payments and would like to divide their mortgage time by half the normal time frame so they can save thousands of dollars in interest. In order to get along with a 15-year mortgage, the buyer will need a highly reliable source of income and enough budget should be left after every monthly payment to cover extra expenses, emergencies and savings. With the use of a 15-year mortgage, your interest rate is locked in so your payments can be the same on monthly payments. Since it is a shorter payoff period, interest payments will be cut by nearly half.
Contrary to what most people would say, the 15-year mortgage isn’t just twice the 30-year mortgage payment. Most often than not, your monthly mortgage payment might increase just 50-60% while the savings over the loan’s time frame can be highly increased. For someone with an interest rate of 4%, they often end up paying almost 2.2 times more interest while using a 30-year loan than using the term of 15-year. Just as you can see, interest savings are known to increase while you’re getting lower rates for a 15-year loan contrary to a 30-year used in most cases.
Owning a home free and clear is the dream of everyone, the problem is being able to feel safe knowing that your home is fully paid off. I’ll list a few pros and cons of using the 15-year loan term for your financing.
- Faster Equity Growth: The 15-year mortgage, having lower interest rates and a higher monthly payment helps to built equity faster in a short time because the principal balance is paid faster.
- Save more Money: Lenders have fewer years of risk for a 15-year mortgage so they’re left to charge lower rates.
Cons of the 15-Year Loan Program
- Higher Monthly Payment: The 15-year monthly payment goes up to about 50% more than the 30-year term. You’re also left to settle property taxes and insurance.
- More Locked Up Equity: Since you are building equity much faster, most of your money gets locked up in a pool of savings only available to be accessed by selling the house or borrowing with a HELOC or home equity loan.
- Qualify for less home: Higher monthly payments simply means you’re qualified for less expensive properties than when the loan is stretched over the 30-year time frame for lower monthly payments.