Many buyers choose a 30-year fixed-rate mortgage for one big reason: the lowest monthly fee. This is because you repay the loan for a long time, 30 years if you keep the loan until the end.
Here is an example: Let’s say you take a 30-year loan with a fixed interest rate of USD 200,000 with an interest rate of 4.10%. Your monthly payment, excluding taxes and insurance, will be around USD 966 per month. This is a relatively inexpensive payment.
Now let’s say you are considering a 15-year mortgage. If you borrow the same USD 200,000 with an interest rate of 3.20% in the form of a 15-year fixed-rate loan. Your monthly installment, again without taxes and insurance, would drop to around USD 1,400, which is a more discouraging figure. However, you will pay a higher monthly fee for only 15 years, compared to 30 years.
When does a 30-year mortgage make more sense?
If your monthly cash flow is your biggest concern, or you earn commissions and your income is variable, a 30-year fixed-rate loan may be the best choice. Because this type of loan has the lowest monthly payment level, it also leaves more money to the budget each month.
A 30-year loan is a good way to enter a nice home with an affordable monthly fee. You can always pay your main balance faster by paying extra every month. However, you are not closed for a higher mortgage payment, you can pay more, but you only have to pay a lower monthly fee.
When does a 15-year mortgage make more sense?
If you can afford a payment that comes with a short-term loan, such as a 15-year mortgage, a 30-year mortgage may not be a wise financial move. A 15-year fixed rate has mortgage rates that are 1% lower than a 30-year fixed-rate loan.
Nobody likes to pay mortgage interest. With a 15-year loan, you will save tens of thousands of dollars. You will pay much less to borrow money from your mortgage.
How long will you live at home?
You should also consider how long you will live in your home. This can make a big difference in whether a 30-year or 15-year mortgage is best. If you plan to live in your home for a short period of time – say eight years or less – then a 30-year loan may make the most sense.
You benefit from lower monthly fees and you won’t have to pay such high interest because you will sell your home well before the loan repayment date. However, if you want to live at home for 15, 20 or more years, a 15-year loan may make more financial sense.
However, if you plan to live in your home for a long time, you might as well shave tens of thousands of the interest that you pay when you live there. An experienced loan specialist can help.