15-Year vs 30-Year Mortgages

15-Year vs 30-Year Mortgages

What makes more sense financially for you, a 15-year fixed-rate mortgage or a 30-year fixed-rate mortgage? How do you determine which loan type is best for you and your family? It is all about taking a close look at your finances.

The differences

As their names suggest, the main difference between a 15-year and 30-year fixed-rate mortgage is its duration. If you make your regular monthly loan payments on time every month, you'll pay off a 15-year fixed-rate mortgage loan in 15 years. You'll pay off a 30-year fixed-rate loan in 30.

There's another big difference that comes with these loans: The average mortgage interest rate on a 15-year loan is smaller than it is on a 30-year loan. According to Freddie Mac, the average interest rate on a 15-year fixed-rate mortgage loan stood at 3.38 percent in January 2018. The average rate on a 30-year fixed-rate mortgage loan stood at 3.95 percent during the same period. Both rates are slightly below what they were in the prior year and still historically attractive. However, you'll note the rate on the 15-year loan is lower than the 30-year rate.

Does that mean that a 15-year fixed-rate loan is the best financial choice? Not necessarily.

Pros and cons

The main benefit of a 15-year mortgage loan is that you'll pay less in interest during the life of the mortgage. This can save you thousands of dollars if you pay off your loan.

For example, if you take out a 30-year fixed-rate $200,000 mortgage with an interest rate of 3.95 percent, you'll pay $144,666 during the life of your loan in interest. If you take out the same loan at the same rate but for a period of just 15 years, you'll pay just $65,386 in interest over the life of the loan.

That is a saving of $76,280 if you would have taken out the 15-year fixed-rate loan.

That does not necessarily mean that the 15-year loan is the best choice for you and your family. Even though a 15-year mortgage comes with a lower interest rate, your monthly payment for such a loan will be higher than it would be with a 30-year fixed-rate loan. In a 30-year loan, the monthly payments are portioned out over a longer period.

Here's an example: For that 15-year fixed-rate loan of $200,000 at an interest rate of 3.38 percent, you'd face a monthly mortgage payment of $1,418. If you instead took out a 30-year fixed-rate mortgage loan of $200,000 at an interest rate of 3.95 percent, you'd pay $949 a month.

The question comes down to this: Can you comfortably afford the monthly payment that comes with a 15-year fixed-rate loan? If so, then taking out one of these loans might be a better choice because you'll spend less money on interest. However, if you cannot afford the payment of the 15-year mortgage in your budget, a 30-year fixed-rate mortgage loan might be a better choice.

Find out if a 15-year or a 30-year mortgage is right for you, contact one of our Mortgage Loan Officers today.

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