How to Choose Between a 15-Year and 30-Year Mortgage

Select’s editorial team works independently to review financial products and write articles that we think our readers will find useful. We earn commission from affiliate partners on many offers, but not all offers on Select are from affiliate partners.

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. This not only involves getting the lowest interest rate possible, but also 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 home loan terms borrowers usually have to choose are 15-year and 30-year mortgages, although some lenders allow you to accept terms as low as eight or 10 years.

These 15 and 30 year mortgages each have their own advantages and disadvantages. It is therefore important to make the choice that best suits your financial goals.

Below, Select takes a closer look at the trade-offs between 15- and 30-year mortgage terms and what you should consider if choosing between them.

Subscribe to the Select newsletter!

Our top picks delivered to your inbox. Shopping recommendations that help you improve your life, delivered weekly. Register here.

Will the monthly payment fit into your budget?

Generally, the longer the life of your loan (or loan term), the lower your monthly payments will be. This is because borrowers repay their home loans in fixed, equal monthly installments 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 lenders in the United States, uses the example of a $240,000 home loan with a 4% interest rate to illustrate this point. If the borrower chooses a loan term of 30 years, he will make a monthly payment of $1,145.80, including principal and interest (insurance and other expenses are not included in this case). If they choose a 15-year loan term, however, the monthly payment is $1,775.25, a difference of more than $629.45 per month.

If you don’t expect to have enough wiggle room in your monthly budget to take on a larger mortgage payment, it might make more sense to go for a 30-year term so you can have smaller monthly payments spread over a longer time horizon.

Is your goal to save on interest?

A major downside of 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, but lenders will usually offer slightly higher rates for this option – the sooner they can be paid off in full, the better, as the risk that you may eventually default on your payments will be smaller.

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

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

Rocket Mortgage

  • Annual Percentage Rate (APR)

    Ask online for personalized rates

  • Types of loans

    Conventional Loans, FHA Loans, VA Loans, and Jumbo Loans

  • Terms

    8 to 29 years old, including 15 years old and 30 years old

  • Credit needed

    Generally requires a 620 credit score, but will consider applicants with a 580 credit score as long as other eligibility criteria are met

  • Minimum deposit

    3.5% if you go ahead with an FHA loan

Advantages

  • Can use the loan to purchase or refinance a single-family home, second home or investment property, or condo
  • Can be pre-qualified in minutes
  • Rocket Mortgage app for easy access to your account

The inconvenients

  • Performs a thorough investigation to provide a personalized interest rate, which means your credit score may take a hit
  • Does not offer USDA loans, HELOCs, construction loans, or mobile home mortgages
  • Does not manage accounts for jumbo loans after closing

SoFi

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed and adjustable rate mortgages included

  • Types of loans

    Conventional loans, jumbo loans, HELOC

  • Terms

  • Credit needed

  • Minimum deposit

Advantages

  • Quick pre-qualification
  • Provides access to mortgage officers for advice
  • $500 off for existing SoFi members
  • 0.25% price reduction when you lock in a 30-year rate for a conventional loan
  • Offers up to $9,500 cash back if you buy a home through the SoFi Real Estate Center

The inconvenients

  • Does not offer FHA, VA, or USDA loans
  • Mortgages are not available in Hawaii

Are you planning to tap into the equity in your home as soon as possible?

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

If, for example, you only put down a 10% down payment on a $400,000 property, the lender essentially owns more than you do since you only paid 10% of the home’s value. As you continue to make your mortgage payments over the years, you will end up owning more property than the lender, increasing your home equity.

Having significant equity in your home can come in handy 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. Therefore, building net worth earlier can also help you achieve certain goals faster.

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

How soon do you want to be mortgage free?

One of the huge advantages of a 15 year loan is that you will be able to pay off your home 15 years sooner than 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 their house down as quickly as possible so they can buy a second property and focus on paying off the mortgage. mortgage for it instead.

Other people may simply be emotionally uncomfortable with debt and prefer to get rid of it as soon as possible. Keep in mind that while accepting a 15-year term to be mortgage-free sooner may come with a slightly lower interest rate and more money saved on interest in overall, you’ll end up having to make higher monthly payments as a trade-off. .

Additional Considerations

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

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

For example, if you really want to go for 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 job. better paid so you can afford to do them.

If you’re still not sure where to start to find a lender to work with, select a few that meet a variety of needs. Ally Bank, for example, does not charge lenders a fee, which can help borrowers save some money upfront during the home buying process.

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

Allied bank

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed and adjustable rate mortgages included

  • Types of loans

    Conventional Loans, HomeReady Loan and Jumbo Loans

  • Terms

  • Credit needed

  • Minimum deposit

    3% if you continue with a HomeReady loan

Advantages

  • The Ally HomeReady loan allows a down payment of just under 3%
  • Pre-approval in just three minutes
  • Submission of the application in just 15 minutes
  • Online support available
  • Existing Ally customers are eligible for a discount that applies to closing costs
  • Does not charge lender fees

The inconvenients

  • Does not offer FHA, USDA, VA or HELOCs loans
  • Mortgages are not available in Hawaii, Nevada, New Hampshire or New York

hunting bank

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed and adjustable rate mortgages included

  • Types of loans

    Conventional Loans, FHA Loans, VA Loans, DreaMaker℠ Loans, and Jumbo Loans

  • Terms

  • Credit needed

  • Minimum deposit

    3% if you continue with a DreaMaker℠ loan

Advantages

  • The Chase DreaMaker℠ loan allows for a down payment of just under 3%
  • Discounts for existing customers
  • Online support available
  • A number of resources available to first-time home buyers, including mortgage calculators, affordability calculator, training courses and home consultants

The inconvenients

  • Does not offer USDA loans or HELOCs
  • Existing customer discounts apply to those with large balances in their Chase deposit and investment accounts

Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff alone and have not been reviewed, endorsed or otherwise endorsed by any third party.

Comments are closed.