The mortgage industry is flourishing—as per the Mortgage Bankers Association, the industry is expected to witness loan origination of more than $2.5 trillion in the next three years.
Given that mortgages are available in various shapes and sizes, you can take your pick depending on your specific needs, such as how long you want to repay, how much interest you want to pay, and how much risk you are willing to take.
Out of the various types of mortgages available, many borrowers wonder whether they are better off with a 15-year mortgage or a 30-year mortgage. You can compare a 15- vs. 30-year mortgage using a calculator to simplify your decision. Here are a few things to take into account before you decide:
15-Year Mortgage vs. 30-Year Mortgage: What’s the Difference?
The key difference between 15- and 30-year mortgages is the repayment period for the loans. When you opt for a 15-year mortgage, you have 15 years to pay off what you borrow, and with a 30-year loan, you have 30 years. The principal of the loan is divided over the repayment period, to be paid in monthly installments, and the interest due is calculated based on the balance of the loan and added to the monthly payments. Since they operate similarly, you can easily compare them.
Typically, 15-year mortgages come with lower interest rates than 30-year mortgages because the risk of you defaulting on your loan is less over a shorter period. Not only that, over the shorter repayment, less interest will accumulate, which means you’ll pay less interest overall. You could save tens and thousands of dollars over the life of the loan by choosing a 15-year mortgage over a 30-year.
On the other hand, 30-year mortgages usually come with lower monthly payments since the total repayment amount is divided over many more months. This can make owning a home more affordable for buyers and monthly payments more feasible for lower-income buyers. Fifteen-year mortgages can be harder to qualify for, as buyers need to demonstrate their ability to pay higher monthly installments.
Shorter-term mortgages, by nature, allow owners to build home equity faster than longer mortgages. Equity is built by paying back the loan principal, and you simply pay it back faster when you make larger payments over a shorter period. The benefit of having equity built up is that you can borrow from it at a later date should an unexpected expense come up or if you’d like to make home improvements.
How to Choose Which One Is for You?
Both 15-year and 30-year mortgages have their advantages, so how do you determine which to get? Your financial health, your goals, the monthly installments you can afford, interest rates, the price of the home, and so on are some of the key considerations in deciding which option is better for you.
What Can You Afford on a Monthly Basis?
Opting for a 15-year mortgage works well when you have a steady income to support higher monthly payments and don’t expect your financial situation to change anytime soon. If your budget is tight or uncertain, however, a 30-year mortgage can provide more breathing room by helping you pay less and save more. Paying off your mortgage faster, accumulating less interest over the life of the loan, and building equity more quickly are all valid goals, but if you can’t afford the monthly payments of a shorter-term mortgage, a longer-term loan gives you a lot more flexibility. And you can always refinance to a shorter term if your situation changes.
If you want to crunch the numbers to see what your monthly payments would be with a 15- vs. 30-year mortgage, use a payment calculator, such as the one offered on Solarity Credit Union’s website. Enter the value of the home, the amount of your down payment, your credit score, and which loan term you’re looking at. This way you can compare the affordability of your options.
How Long Will You Live There?
Ask yourself how long you plan to live in your new home. While some folks buy a home and plan to live there indefinitely, others know from the start that their stay will be short. Choosing a 15-year mortgage can be the right way to go if you plan to sell quickly. You build equity faster, pay more principal and less interest, and have a better chance of making more money during the resale.
How Much Is the Home You’re Buying?
A 30-year mortgage makes it easier for a borrower to afford a higher-priced house than a 15-year loan. Lower monthly payments can also leave the homeowner with more liquid income during the month if they plan to make home improvements or have other expenses to cover, such as an HOA fee. Again, using a mortgage repayment calculator can help you determine how much house you can afford.
Interest Rates
You can talk about mortgages without talking about interest rates, and they can make a difference when deciding whether a 15- or 30-year mortgage is best for you.
If the rates are low, you may be better opting for a longer term at a low rate and investing the money saved toward something that generates a higher return. But if the rates are high, going for a shorter term might make more sense, as you’ll only pay the interest for 15 years and not 30.
Need a Hand?
Any mortgage is going to significantly impact your finances for years to come. So take the time to assess your finances, weigh your loan options, and use a mortgage calculator like the one Solarity has to crunch the numbers before deciding what works best for you. Buying a home is a big decision, and if you have questions about what you can afford and which options are right for you, the best thing you can do is reach out to your lender for guidance. At Solarity Credit Union, expert Home Loan Guides are available to answer your questions, take a close look at your financial situation with experienced eyes, and even help you with the math so that you can opt for the loan that works best for you.
