Which one is right for you?


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When it comes time to start shopping for a mortgage, it’s often a 30-year loan that comes to mind. After all, nearly 90% of buyers opt for a 30-year fixed rate loan, according to Freddie Mac. But this is not your only choice. Some buyers opt for a 15-year loan that allows them to pay off their mortgage faster.

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Looked: Here’s how mortgage rates have fluctuated over the past decade

Find out which loan term is best in this 15-year vs. 30-year mortgage overview.

Fixed mortgage rates over 15 and 30 years

Banks usually offer standard 15 and 30 year mortgage terms, which is best for most consumers.. Whatever term they choose, consumers generally choose a fixed rate. While a variable rate fluctuates over time and may not fully amortize on the repayment date, a fixed rate keeps payments consistent throughout the life of the loan and ensures that the loan will be fully repaid at the end. of the term – no lump sum payment to worry About.

Useful: Tips to get your mortgage payments as low as possible

15-year mortgages

A 15-year mortgage is the favorite of financial guru Dave Ramsey. “I recommend 15-year mortgages, and never more, because the normalization of the 30-year mortgage has helped create a constant state of financial bondage for the middle class. It has caused ordinary people to lose hope of ever paying off their homes and being totally free from their debts, ”said Ramsey.

The main advantage of a 15-year mortgage is that it pays off your loan faster, so you pay less interest over the life of the loan. And because a 15-year mortgage is less risky for lenders, you’ll also get a better interest rate. Indeed, the average rate on October 11, 2021 was 2.23% for a 15-year loan against 2.99% for a 30-year loan, according to the Saint-Louis Fed. When you factor in both the lower rate and the shorter term, that’s over $ 67,000 in interest saved over the life of a $ 200,000 loan.

Because you pay off your loan faster with a 15-year mortgage, you also build equity faster. This makes it easier to take out a home equity loan or line of credit to cover a large expense, make renovations or even buy an investment property.

The downside to a shorter 15-year mortgage is that the monthly payments are higher, around 55% higher than a 30-year loan of the same amount. As a result, you may have to settle for a home that is cheaper than what you could afford on a 30-year loan and control your other expenses to avoid overstretching your budget.

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30-year mortgages

The 30-year mortgage is the most popular for good reason. The longer term keeps your mortgage payments affordable and allows you to buy more home than you could afford on a 15-year loan. You might even have an easier time getting approved because your debt-to-income ratio, which measures the amount of your monthly debt payments relative to your income, will be considerably lower with a 30-year loan, which will make you a less risky borrower.

The main disadvantage of 30 year loans is that they are more expensive. You’ll pay more interest over the life of the loan because you’ll pay it off for longer, and you’ll likely pay a higher rate as well.

Another thing to consider is that a 30 year loan can cause you to go over budget on your home purchase – especially if you are thinking about affordability strictly in terms of the monthly payment and ignoring the purchase price of the home. . The monthly payment difference between a mortgage of $ 200,000 and a loan of $ 220,000 is “only” $ 84 per month, assuming a down payment of 20%. However, you will also pay over $ 10,000 more in interest over the life of the largest loan, and you may incur opportunity costs to tie up money that you could have invested or saved in a fund. emergency or retirement.

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How to save money on your 15 or 30 year mortgage

You have many ways to pay less for your mortgage, no matter how long you choose.

Make a deposit of 20% – or more

Larger down payments are better than smaller down payments, and 20% is the norm because that’s the amount needed to avoid having to pay a private mortgage.ge insurance, which benefits the lender, not you. A 20% down payment also means you borrow less money, reducing your monthly payment and the time it takes to pay off your mortgage.

Shop for the best mortgage rates

The mortgage industry is very competitive, so do your due diligence and look for the best mortgage rates. Even a few tenths of a percentage point can save you tens of thousands of dollars for the duration of your mortgage.

Good to know: Why it’s always worth refinancing your mortgage now – except in this situation

Be patient

Finding the right home takes patience, just like finding the right mortgage. If you can’t find the right terms, consider postponing your purchase for a few months. This can give you the time you need to increase your credit score and save a bigger down payment, which can save you thousands of dollars in the long run.

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Ryan guina contributed to the writing of this article.

Last updated: October 21, 2021

This article originally appeared on GOBankingRates.com: 30-year mortgage vs 15-year mortgage: which one is right for you?


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