Are you deciding between a 15- or 30-year mortgage? There are several factors to consider, your age; your life plan; how long you expect to live in a home; what type of savings plan you have; if you expect to refinance at some point; if this is a first-time home purchase; and whether you can afford to pay off a loan in 15 years?
What Is the Real Cost of a Mortgage?
Purchasing a home and taking out a mortgage is a complex process. In order to discern what is best for them, consumers really need to educate themselves and make sure they understand the true cost of their loans and what they can afford. The amount being borrowed, known as the principal, is typically straightforward. What may not be as clear is the cost of the loan and the interest rate attached to it.
A primary benefit of a 15-year mortgage is that it offers a lower rate compared to a 30-year loan. This means the homeowner will pay interest on the loan for only half as long. But it requires a higher monthly payment because the principal needs to be paid down faster. Every home purchaser has a unique financial situation, but generally speaking, first-time buyers will often choose a 30-year option because of lower monthly payments. Over a longer term, a more expensive home can become more “affordable” by the month.
The Reality
Typically, 15-year loans cost less in the long run, in terms of associated loan costs like points and interest paid. The 30-year home loan is by far more popular because most borrowers cannot afford the higher payments reflected in a shorter-term loan.
The longer-term loan does offer affordability and allows buyers to essentially buy more home than they could with a 15-year repayment plan. Over the long run, a homeowner can save more money and have more disposable money available if they opt for a 30-year loan. But, this is where age and plans for how long you want to retain a property are important. As you mature and consider retirement, you want to be lowering your living costs, not increasing them or paying a large monthly mortgage on less income.
Adjust Payments
One approach that involves less risk for homeowners, is to take a longer mortgage but to pay it off sooner as if they were paying on a 15-year loan. To do this, however, you must make sure there is no penalty for prepayments and that the extra payments are applied to pay down the principal and not getting eaten up in interest costs.
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