Did you know 43% of new homeowners still struggle with mortgage payments? But the right mortgage term can help you stay out of this category. A 30-year mortgage offers lower payments but higher costs, while a 15-year saves interest.
So, you must assess your finances and pick the mortgage that suits your needs. Get pre-approved and avoid payment defaults. It provides an estimate of your loan amount and monthly mortgage payments.
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15-Year vs. 30-Year Mortgages: What Are the Differences?
When you compare a 15-year mortgage and a 30-year mortgage, there are two main factors to consider:
- Loan Term: A 15-year mortgage gets paid off in half the time of a 30-year mortgage. This means higher monthly payments, but you’ll own your home faster.
- Interest Rate: Typically, the average rate for a 15-year mortgage is 0.5% lower than a 30-year mortgage.
When Should You Buy a 15-Year Fixed-Rate Mortgage?
There are aspects that you should factor in to find out the right time to purchase, like if:
- You Have a High Disposable Income: 15-year mortgage payments can be 50-60% higher than a 30-year mortgage. If your income allows for this, you can save on interest.
- You Want to Build Equity Fast: With a 15-year mortgage, you pay down the principal faster.
- You Plan to Retire Soon: Pay off your mortgage before your retirement. This could provide financial security.
- You Have a High Credit Score: Borrowers with good credit scores often benefit the most from the low interest rates on 15-year mortgages.
When Should You Buy a 30-Year Fixed-Rate Mortgage?
A 30-year fixed-rate mortgage has a long term and might be your best option if:
- You Prefer Low Monthly Payments: A 30-year mortgage spreads the cost over a long period that makes payment more manageable. This is especially helpful for those with tight budgets.
- You Want Financial Flexibility: Low payments mean more disposable income. Plus, you can use the extra cash to invest, save, or cover unexpected expenses.
- You Expect Salary Hikes: If you’re early in your career and expect your Income to increase, start with a 30-year mortgage. You can always make extra payments or refinance to a 15-year mortgage later.
15-Year vs. 30-Year Mortgages: How to Calculate?
Here’s how you can calculate the monthly payment of the mortgage terms along with the interest:
Monthly Payment Calculation
Use a mortgage calculator to compare monthly payments.
For example, if you take a $300,000 loan at a 3% interest rate, the monthly payments would be:
- A 15-year mortgage would cost $2,071 per month.
- A 30-year mortgage would cost $1,347 per month.
Total Interest Paid
To calculate the total interest paid, multiply the monthly payment by the number of payments (180 for a 15-year loan, 360 for a 30-year loan), and then subtract the original loan amount.
Total Interest for a $300,000 Loan at 3% Interest:
- 15-Year Mortgage:
- Monthly payment: $2,071
- Total paid over 15 years (180 payments):
$2,071 × 180 = $372,780 - Total interest paid:
$372,780 − $300,000 = $72,780
- 30-Year Mortgage:
- Monthly payment: $1,347
- Total paid over 30 years (360 payments):
$1,347 × 360 = $485,160 - Total interest paid:
$485,160 − $300,000 = $185,160
What Are the Pros and Cons of a 15-Year vs. 30-Year Mortgage?
15-Year Mortgage: Pros
- Lower Interest Rate: Usually 0.5% lower than a 30-year mortgage.
- Less Interest Paid: You pay significantly less in interest over the life of the loan.
- Faster Equity Build: You own your home faster, building home equity quickly.
15-Year Mortgage: Cons
- Higher Monthly Payments: Payments can be 50-60% higher than a 30-year mortgage.
- Less Financial Flexibility: Higher payments mean less disposable income for other investments or expenses.
30-Year Mortgage: Pros
- Lower Monthly Payments: Payments are lower, making it easier to manage your budget.
- Greater Financial Flexibility: More disposable income for savings, investments, or emergencies.
- Easier Qualification: Lenders often have lower income requirements for 30-year mortgages.
30-Year Mortgage: Cons
- Higher Interest Rate: The current interest rates are 6.4%. That is higher than a 15-year mortgage.
- More Interest Paid: Over time, you’ll pay much more in interest.
- Slower Equity Build: It takes longer to build equity in your home.
Which Option Is Right for You?
It depends on your financial situation and long-term goals. A 30-year mortgage allows low monthly payments, but with a high interest over time. However, if you can afford higher payments and want to save on interest, go for the 15-year mortgage.
Moreover, to maximize the benefits, improve your credit score and save for a larger down payment. Plus, explore properties that fits your budget. Start looking for homes for sale, now!
» Need More Clarity? Read these exclusive Houzeo reviews and learn why the platform is the best in America’s competitive housing market.
Frequently Asked Question
Is paying off a 30-year mortgage in 15 years the same as a 15-year mortgage?
No, you will pay the same amount in interest if both mortgages have the same interest rate and are repaid in 15 years.
Is it worth it to refinance a 15-year mortgage?
Refinancing may be worth it if you intend to stay in the house for an extended period of time, can afford the higher monthly payment, and can afford the closing fees.
What are the average mortgage rates for 15 and 30-year mortgages?
