People often wonder if they should go with a 15 year or a 30 year mortgage. What is the best fit for you? Here are some of the differences between the two mortgages to help you decide which loan term is best for you! Always remember, you can contact us at any time to help you find the best loan for your needs.
15 year term
A 15 year mortgage term is typically accompanied by a lower interest rate. The bank sees a 15 year loan as less risky than a 30 year loan. Therefore, the bank will let you borrow at a lower rate. A 15 year loan will also help you own your home much quicker. You can pay off the loan in half the time!
Some risks to consider, however, are the higher monthly payments. Since you are paying off the home much quicker, you will have to pay twice the principal amount each month. A general rule of thumb is that you should put no more than 28% of your pre-tax income towards the mortgage.
30 year term
While the 15 year loan can help you get out of debt quicker, there are several advantages to going with the traditional 30 year loan. A benefit of a 30 year term is having more immediate financial breathing room. With only half the monthly payment of a 15 year term, you can allocate money where you would like to. You can increase your savings, get a new car, go on a vacation, etc. There is more money available to you immediately.
You can ‘buy more house’. Simply put, for a similar monthly payment on a 15 year term, you could afford a larger house on a 30 year term.
A third alternative?
Well, here’s a third alternative that allows you to have the both of best worlds.
Even if you can pay off the home in 15 years, consider still getting a 30 year loan. If there aren’t any prepayment penalties, you can pay extra on your monthly payment as if it’s a 15 year mortgage! In the months where you do need or want any extra cash, however, you can default to the prescribed 30 year monthly payment. This way, you can pay the home off quicker if you choose to do so, but aren’t required to pay it off quicker per se.