Even though owning a home is the American dream, it’s also an expensive commitment that can have serious financial repercussions if you make the wrong choice. Luckily, there are many ways to make sure you’re making the best decision possible. One way to do this is by choosing between a 15-year and 30-year mortgage loan.
In this brief article, we’ll run through the main differences between these two loans so you can choose which one would be best for you and your family.
Interest Rates
Interest rates for a 15-year mortgage are typically lower than those for a 30-year mortgage. That’s because you’ll be making payments for half as long. You’ll also have less interest to pay over that time period.
The total amount of interest is made up of two things: The part that compounds while you’re paying off your loan (the principal) and the part that compounds during the time between when you start paying it off and when it’s all paid off (the accrued interest). Since there’s less accrued interest with a 15-year mortgage, the overall rate will be lower.
Overall Cost
The 30-year mortgage is the most popular option for homebuyers, but it’s not always the best choice. If you have a lower interest rate, such as 4% on a 15-year mortgage versus 5% on a 30-year mortgage, then your overall cost will be lower with the 15-year option.
If you can afford a higher monthly payment and don’t plan to move anytime soon (or ever), then it might make sense to go with the 30-year fixed rate since you won’t have any fees or penalties if you decide to refinance into another loan in that time period.
Home Equity
A 15-year loan will allow you to pay off your mortgage much sooner, which means that you’ll have more equity in the long run. In fact, if you sell your house at the end of a 30-year loan and then buy another with a 15-year mortgage, you’ll end up with significantly more money than if you had stayed on that 30-year plan all along.
Faster payoff
In the example above, you can see that the 15-year mortgage has a lower interest rate and pays off faster than a 30-year mortgage. It also has lower payment amounts, so you’re paying less each month. Therefore, if you want to pay your home off as soon as possible, then your best bet will certainly be a 15-year mortgage rather than a 30-year term.
15-year mortgages are a very good option for most people
Both 15-year mortgages and 30-year mortgages have their advantages. A 30-year mortgage is a good choice for some people, but it might not be the best option for you. In fact, most people who choose a 15-year loan will find that it’s cheaper than a 30-year one.
15-year loans are also very flexible: if you decide that your financial situation has changed and you want to refinance into something else (like an adjustable-rate loan), you can do so without penalties or fees because there’s no residual debt remaining from your old mortgage.
Conclusion
If you can afford a 15-year mortgage, it will be the most financially responsible choice for you in the long run. However, If you don’t qualify for a 15-year mortgage, then the 30-year mortgage is still a solid (if slightly less ideal) option. Whichever path you choose, just remember that it’s never too late to refinance your existing loan if necessary!
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