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30-Year vs. 15-Year Mortgage – Which Is a Better Fit for You?

Man and women sitting on the floor holding a blue print drawing of a house
November 30 2018 • by Andrea Rodrigues • Home Ownership, Home Tips, Loans

Buying a home can be a very stressful experience. There are so many choices to make. Where should I live? Should I buy a single family or a multi-family property? Should I buy a fixer-upper or something that’s move-in ready? And perhaps most importantly, how am I going to finance the purchase?

If you’ve already started looking into your mortgage options, you may have heard about “30 year” and “15 year” fixed-rate mortgages, but you may not know exactly what they are, or if either is a good fit for you.

Before we dive into their differences, you should ask yourself a few more questions. For instance, what size monthly mortgage payment can you afford? What other financial obligations and goals do you currently have? How stable is your work situation? How close are you to retirement? Your answers to these questions will help determine if a 30-year fixed or 15-year fixed mortgage could be a good fit for you.

A 30-year fixed-rate mortgage is by far the most popular type of mortgage in the United States. According to some estimates, 30-year mortgages account for more than 75% of U.S. home loans. And they’re popular for a reason: lower monthly mortgage payments.

With a 30-year fixed mortgage, your monthly payments are generally lower than they would be with a 15-year fixed mortgage, because the payments are spread out across a longer period of time. A lower monthly payment can allow buyers to save for other financial goals, and it can make it easier to weather financial hardships such as job loss or unforeseen medical expenses. In some cases, a lower monthly payment can also make it possible for a homebuyer to purchase a larger, higher-priced home than they would otherwise be able to afford with a shorter loan term.

In many cases, buyers can even pay down a 30-year fixed rate mortgage in less than 30 years, by making additional payments on a voluntary basis. This can help them save money on interest fees. If you’re interested in paying down a 30-year mortgage faster with extra payments, just be sure to read the fine-print on your mortgage first, as some lenders may charge a prepayment penalty if you pay off your mortgage early.

30-year fixed rate mortgages do have some potential downsides to consider as well. The most obvious is that 30 years is a long time to have a large amount of debt hanging over your head. Another thing to consider is that the interest rate on a 30-year mortgage will typically be higher than the interest rate on a 15-year mortgage. And that higher interest rate, coupled with a longer term, means that you’ll likely end up paying a lot more interest on a 30-year mortgage than you would on a 15-year mortgage over the lifetime of the loan.

One of the biggest upsides to a 15-year fixed rate mortgage is that your home will be completely paid off in 15 years if you make all of your payments on schedule. If you’re looking to retire in the next 20 years, and don’t want to be burdened with mortgage payments in your “golden years”, a 15-year mortgage might be worth considering.

Paying off your home more quickly also means that you’ll build equity in your home faster. And, at the end of your 15-year loan term, you’ll have paid a lot less in interest than if you had stretched your payments out over thirty years. As we mentioned earlier, the interest rate is commonly lower with a 15-year mortgage as well.

There are some potential downsides to keep in mind with 15-year mortgages however. For starters, your monthly mortgage payments are going to be notably higher than they would be with a 30-year term. And, those higher monthly payments could impact your ability to set aside funds for other purposes, such as college tuition, retirement, or investments.

The main thing to keep in mind is that you shouldn’t select a mortgage product on a whim. You’ll want to do some “homework”, and speak with a qualified mortgage professional to ensure you’re getting the type of loan that best suits your budget, lifestyle, and goals. 

A home is one of the most significant purchases in your lifetime, so it makes sense to educate yourself and make the best decision possible.