Happy Home InsiderMortgages are a cornerstone of the American dream. These loans allow the average citizen to afford to purchase homes and pay off a lender (typically a financial institution such as a bank) at an interest until the balance of the purchase is satisfied, at which point the title and ownership of the home officially transfers from the lender to the homeowner. The two most popular types of mortgages have terms of 15 years and 30 years; while both of these options accomplish the same thing, the two paths have various attributes that may or may not effect which one is appropriate for your situation. Let’s start with the basics; 15-year mortgages have higher monthly payments, but lower interest rates, while 30-year mortgages, have lower monthly payments and higher interest rates.
The 30- Year Mortgage
The more popular option between the two is the 30-year mortgage. With this type of loan your monthly payments will be lower, therefore you’ll have more cash on-hand each month enabling you to save for retirement, college funds, and other expenses. With a 30-year mortgage, you’ll also qualify for a larger loan amount. That might all sound great, however, there are also drawbacks to this option to take into consideration. For example, with a 30-year mortgage, you’ll be paying a higher mortgage interest rate as well as more interest over the life of the loan. With the 30-year mortgage, your equity in your home builds up at a slower rate. If you’re planning on staying in your home for a shorter period of time, however, the 30-year mortgage can make considerably more sense. You won’t wind up paying as much interest because you’ll be selling long before your loan’s paid off, and you’ll still be able to enjoy the convenience of smaller monthly payments.
The 15-Year Mortgage
With 15-year mortgages, you save yourself a ton of money on interest in the long run. For example let’s say that you have a $100,000.00 on a 30-year fixed-rate loan with an interest rate of 4.13%; despite having a lower monthly payment, over the life of the loan, you’ll wind up paying 70 thousand dollars in interest. With a loan for the same amount on a 15-year mortgage with a 3.2% interest rate, you’d wind up paying just over 1/3 the interest at around $26,000.00 over the life of the loan. In addition to saving yourself some major bucks in the long run, you’ll also wind up building equity much more quickly. That being said, with a 15-year loan, you’ll have less extra cash in your pocket at the end of each month due to the higher monthly payment. You’ll also qualify for a smaller amount with a 15-year loan than you would with the 30-year loan.
Which is Right For You
Ultimately, if monthly cash flow is your primary concern, then hands down the 30-year option is going to be the right choice for you. Between the lower monthly payments, and the extra cash afforded to you by those lower payments, it makes more sense to take this route and maintain piece of mind in your ability to keep your head above the water. If you’ve got the cash flow to keep up with the higher monthly payments that come along with a 15-year mortgage, it might be a wiser path for you to follow. In addition to cutting the amount of time you’ll be making mortgage payments down by 15 years, you’ll also save tens of thousands of dollars over the life of the loan.
