It’s quite shocking and overwhelming the vast array of mortgage options banks offer and one of the biggest decisions you’ll make in the mortgage process is the duration of your loan term.
In other words, you’ll have to weigh the pros and cons of a 15-year mortgage and 30 year-mortgage. How long are you willing to linger with your loan? What kind of monthly payments can you stomach? How do mortgage rates affect the bottom line? We’re here to help with a little mortgage math!
What’s The Difference?
At first glance, the difference between a 15-year mortgage and a 30-year mortgage seems obvious: A 15-year mortgage lasts 15 years and a 30-year mortgage lasts 30 years.
Now here’s something you might not know about mortgage terms: Since a longer loan life means you can make smaller payments, a recent survey found that 86% of home loan applicants opt for a 30-year mortgage (a fixed-rate mortgage).
Here’s how the mortgage term numbers play out: If you purchase a $300,000 home with a 20% down payment, a year-year (fixed) mortgage at the going interest rate (currently 3.68%), your mortgage payment will be $1,102 per month for 30 years.
Get a 15-year mortgage for the same loan amount, and you’ll be rewarded with a slightly lower interest rate (currently 2.96%), but you will have to pay more per month – $1,622.
Bottom line? If you can’t afford large monthly payments or are worried about not being able to in the future due to job loss, sporadic income, health issues, or whatever other curveballs might come with the higher interest rate rather than 15-years loan with the lower mortgage with the higher interest rate rather than 15-year loan with the lower mortgage rate. The peace of mind alone could be priceless when it comes to choosing the terms of your mortgage (which may also have property tax rolled into it). And in many cases, the 30-year mortgage (even with its higher interest rate) is a more practical loan, depending on personal finances and cash flow.
Benefits of a 15-Year Mortgage
What many homeowners forget to factor in is that a 15-year mortgage may cost more now, but it will save you major cash in interest payments to your lender down the road.
A 15-year loan will save you a ton of money. You might be surprised by just how much, so let’s continue with the above example: For a $300,000 home purchased with a 20% down payment, a 30-year mortgage at today’s average interest rate will end up costing you a total of $456,708 by the time 30 years are up.
By contrast, a 15-year loan at today’s average interest rate will ultimately cost you only $351,933. In other words, a 15-year mortgage ill save you $104,775 in interest payments.
