15-Year vs. 30-Year Mortgage: What You Need to Know
Buying
For people looking at purchasing their first home, the decision of whether to opt for a 15-year mortgage or a 30-year mortgage can be stressful.
While each option has its benefits and drawbacks, most homeowners find that they have a difficult time deciding which is best for them. If you’ve ever wondered about what makes people choose a 15 year vs. a 30-year mortgage, read on to learn more.
The History of the 30-Year Mortgage
When you look back at the history of mortgages in the U.S., most of them are 30-year terms. Ideal for first-time homeowners, the 30-year mortgage is a wonderful option for keeping payments low and making first-time home ownership an accessible goal.
Today, however, the tides are changing. Since 15-year and 30-year mortgages are structured very similarly, the main difference buyers are deciding between is the term, and term affects cost in a large way.
Why a 15-Year Mortgage May be a Better Idea
While most would-be homebuyers are attracted to the low rates offered by a 30-year mortgage, buyers who make this decision are essentially choosing to rent the same amount of money for a period that’s twice as long, which comes at more than twice the cost.
While the payments associated with a 30-year mortgage may be lower, the principal of a 30-year mortgage declines much more slowly, which means a buyer with a 30-year mortgage at 4% will pay 2.2 times as much as another buyer who rented the same amount of money on a 15-year term.
This is startling to many buyers, and it’s one thing that’s starting to change the tides of mortgages.
How 15 Year vs. 30 Year Mortgages Affect Banks
When it comes to a bank’s view of a mortgage, 15-year mortgages are much more attractive. In addition to the fact that consumers on these loans pay less interest, banks also have to pay more fees on 30-year mortgages.
Which Is Right for You?
While there are benefits and drawbacks to each the 15-year and the 30-year mortgage, the decision about which is ultimately right for you will depend largely on your financial situation and preferences. While you’ll save money in the long-term with a 15-year mortgage, most homeowners find the high payments associated with a shorter term uncomfortable.
If you’re in this boat, it may be smarter to opt for a longer term and pay the loan off aggressively. Whichever option you choose, it’s wise to understand how each loan works and why so many people opt for a 30-year term. This, in turn, can help you make smarter financial decisions for yourself in the long run.
If you’re having doubts about which is right for you, speak with a financial advisor. He or she will be able to help you look at your finances and make a smart decision.
