How to choose between a 15 and 30 year mortgage

One of the most important parts of taking out a mortgage to buy a home is making sure the terms of the loan best suit your financial needs. Not only does this mean securing the lowest interest rate possible, it also means choosing the right mortgage term.

The term of the mortgage tells you how long you have to pay off your loan in full. The two most common mortgage loan terms that borrowers generally have to choose from are 15-year and 30-year mortgages, although some lenders will allow you to accept terms as low as eight or 10 years.

Each of these 15-year and 30-year mortgages has its own advantages and disadvantages, so it’s important to make the decision that best suits your financial goals.

Below, Select takes a closer look at the pros and cons of 15-year and 30-year terms on a home loan and what to consider when choosing between them.

In general, the longer the life of your loan (or loan term), the lower your monthly payments will be. This is because borrowers pay their home loans in fixed, equal monthly payments over the life of the loan: someone with a longer time horizon will end up with smaller payments compared to someone with a shorter time horizon for the same loan amount.

Rocket Mortgage, one of the largest home loan lenders in the US, uses an example of a $240,000 home loan with an interest rate of 4% to illustrate this point. If the borrower chooses a 30-year loan term, they will make a monthly payment of $1,145.80 that includes principal and interest (insurance and other expenses are not included in this case). However, if they choose a 15-year loan term, the monthly payment works out to $1,775.25 — that’s a difference of more than $629.45 per month.

If you anticipate not having enough wiggle room in your monthly budget to afford a higher mortgage payment, it might make more sense to choose a 30-year term so you can have smaller monthly payments over a longer time horizon.

One major downside to having a 30-year mortgage is that you’ll end up paying more interest over the life of the loan. Not only will you be charged interest for a longer period of time, but lenders will also generally offer slightly higher rates for this option – the sooner they can be paid off in full, the better, as the risk that you may default on your payments will be reduced. be smaller

Some borrowers may balk at the idea of ​​paying more interest over time and may prefer to save on those fees by paying a slightly higher amount each month. If saving on interest is your top priority, a 15-year mortgage may be better for you.

If you’re looking to get a lower interest rate on your mortgage, make sure you also have a high credit score when you apply and consider one of Select’s top rated mortgage lenders like Rocket Mortgage and SoFi.

Home equity is a measure of how much property you actually own. Think of it this way: When you take out a mortgage, you’re making a down payment but paying the lender back for the loan they gave you to buy the house.

If, for example, you only put a 10% down payment on a $400,000 property, the lender essentially owns more than you, since you only paid 10% of the home’s value. As you continue to make your mortgage payments over the years, you will eventually own more property than the lender, which is how you build value in your home.

Having a significant amount of equity in your home can be helpful if you decide to take out a home equity line of credit, or HELOC, for major renovations or other major expenses. You can also use the equity in your home through a HELOC to make a down payment on an investment property, so building equity sooner can also help you reach certain goals faster.

The higher your monthly mortgage payments, the faster you can build your equity, another reason why a 15-year mortgage may be more attractive to some borrowers.

A big benefit when it comes to opting for the 15-year loan term is that you’ll be able to pay off your home 15 years sooner than you would if you opted for the 30-year mortgage.

Being mortgage-free means you’ll have more room in your budget for other things: Some homeowners may want to pay off their home as quickly as possible so they can buy a second home and focus on paying off the mortgage.

Other people may feel emotionally uncomfortable about having debt and prefer to get rid of it as quickly as possible. Keep in mind that while taking on a 15-year mortgage-free term may lead to a slightly lower interest rate and more money saved in interest overall, you’ll end up having to make higher monthly payments to compensate. .

If you want to build equity faster and save on interest, but can’t commit to higher monthly payments on a 15-year mortgage, you can try making additional mortgage payments to help pay off the loan faster. This works best as long as your mortgage lender does not charge prepayment penalties for paying off the loan early.

If you are still a few years away from starting the home buying process, it may still be helpful to contact some mortgage lenders so you can learn more about the financial moves you need to make to be in an ideal position to buy your home. .

For example, if you really want to take out a 15-year mortgage but your current income doesn’t allow you to make higher payments, a mortgage lender might suggest you save more money and get a better-paying job so you can pay them.

If you’re still not sure where to start when it comes to finding a lender to work with, Select has put together a few to suit a variety of needs. Ally Bank, for example, charges lenders no fees, which can help borrowers save a little money up front during the home buying process.

Chase Bank, among other popular lenders, also offers a jumbo loan option for those who need to borrow more than $647,000 to purchase their home.