The popularity of fixed-rate mortgages has grown immensely after the recent housing market crisis, during which many people lost their homes. They are much more secure than their adjustable rate counterparts and this makes them a top choice for most borrowers. Once you are sure that you want to get a fixed-rate loan, you have to decide on its term. There are two main options – a 30-year term and a 15-year term. Find out how the two options compare to make the right decision.
The 30-year mortgages typically come with a slightly lower interest rate compared to the 15-year ones. Lenders can afford to offer this perk since they will still get higher profit. This is because the lower interest will be charged for longer. In fact, it will be charged two times longer. As a result, you will have to pay a higher total interest amount. Hence, the slightly lower interest should not be the decisive factor when you are making a decision.
The 30-year home loans have lower monthly payments compared to their 15-year counterparts. This is because the interest payment is spread over a longer period of time. The slightly lower interest rate plays a role as well, but it is not significant.
The benefits of a lower monthly payment are obvious. The risk of you defaulting on the loan will be much lower. You will find it easier to repay the loan. You will have more money to spend and to save for important things such as your children’s education. At the same time, you will have to allocate a chunk of your monthly budget towards making these payments for much longer. You will also gain equity in your house more slowly and this can have an adverse effect on your borrowing capability and on your ability to refinance.
You will have the option to borrow more money and buy a bigger house if you choose a 30-year fixed-rate mortgage. Since the monthly payments will be lower due to the longer term, lenders find it less risky to extend more funds. It is great to be able to get more money, but this will push up the cost of the loan considerably. You have to decide whether you are willing and able to bear the higher cost.
The 15-year mortgages are cheaper than the 30-year ones. This is because interest is charged for a shorter period of time and the total interest amount is much lower. With a 15-year loan, you will save quite a lot of money. You will gain more equity more quickly and this will put you in the best position for refinancing and for getting home equity loans and credit lines.
With a 30-year home loan the risk comes from the fact that you will have to repay it for longer. The risk of income reduction and of losing your income is higher in the long term. Besides, if you default on the loan during the 25th year of the term, you may still lose the property irrespective of the fact that you own a large chunk of equity and that you have already spent a lot of money. With the 15-year loan, the risk has to do with the higher monthly payments. If you are not disciplined, you can easily get into trouble.
Now you can decide which one of these types of mortgages is better for you.