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Buying a home is probably one of the biggest purchases of your life.
And for most of us, it certainly won’t be cheap.
That means you probably you are not paying cash for the house these days, which means that additional costs such as interest and lenders will further increase the total cost of buying your home (read about all the costs in our article: 10 costs to keep in mind when buying an apartment).
When dealing with such a large sum of money, it is more important than ever to choose the mortgage that makes the most financial sense for you.
Here is the difference between a 15-year mortgage and a 30-year mortgage.
Differences between a 15-year mortgage and a 30-year mortgage
Lenders allow you to choose a term for a home loan when applying for a mortgage, which is the time in which you will repay the balance.
The two most common options? 15-year and 30-year mortgages. In bOther types of home loans address the issue of affordability in two different ways.
A 15-year mortgage costs you less in the long run because you pay off the house in half the time to make with a 30-year mortgage.
In other words, you will pay interest for 15 less years. As you will see in a minute, that means a lot of money.
In addition, interest rates for 15-year mortgages are usually lower than the 30-year option, which saves you even more.
Nevertheless, 30-year mortgages are more favorable in the short term because they have spread your debt over a longer period of time.
A 30-year mortgage term makes buying an apartment more affordable, even though you end up paying more interest than if you took out a 15-year mortgage.
Comparison of two mortgage terms
For this scenario, suppose the price of an apartment is $ 340,000. The average millennial shopper does a deposit of approximately 8%, so I will also assume that the loan amount on this purchase is $ 312,800 (with an 8% down payment of just over $ 27,000).
This is where things start to fall apart.
I will use two different interest rates for each loan:
- 2.21% for a 15-year mortgage.
- 2.77% for a 30-year mortgage.
All of these variables may seem to lead to a mathematical equation, but don’t worry. Details can be easily connected to the MU30 Simple mortgage calculator to quickly compare different mortgage terms.
Here’s how every mortgage is collected for a hypothetical home buyer.
|15-year mortgage||30-year mortgage|
|Monthly payment (principal and interest only)||2,043.28 USD||$ 1,280.29|
|Total interest paid over the life of the loan||54,991.22 USD||$ 148,106.03|
As you can see, A 30-year mortgage for the same house will cost more than $ 93,000 over a 15-year mortgage. But, your monthly mortgage payment would be nearly $ 800 less at the 30-year option – This is a big difference in your daily budget.
For many, choosing a 30-year mortgage over a 15-year option would be the difference between offering an apartment and continues to lease.
When to consider a 15-year mortgage
If your emergency savings are solid
Because you’ll pay more for your mortgage each month, you’ll have less room in your budget to settle surprising costs.
Make sure you have at least three to six months of costs saved in the emergency warehouse in case you lose your job.
Read more: 5 ways to start an emergency fund
If you can save while you cover the mortgage
A 15-year mortgage can be a smart money move, but not if it threatens your short-term financial health. Consider this option if you can comfortably afford a monthly payment without sacrificing your ability to save elsewhere, including your retirement savings.
If you want to deal with debt quickly
A 15-year mortgage can be a good choice for people who are passionate about resolving debt quickly and aggressively. Eventually, you will save a lot of money on interest and halve the loan.
Advantages and disadvantages of a 15-year mortgage
- Eventually, you will pay less for the house. Cost of interest is reduced if you pay more than 15 years less.
- You will get a lower interest rate. 15-year mortgages are lower than the 30-year option.
- You will build capital faster in the house. More of your monthly payment goes to principal instead of interest. If you sell your home, you will get a lot more money.
- You can apply for equity financing. If you stay at home, you can access equity financing products if you have a larger ownership stake in the property.
- Without debt, you will become much sooner. If you don’t have a house payment, you can opt for long-term financial security over the years and retirement because you won’t have to worry about a mortgage payment.
- Your monthly mortgage payment will be higher. Spending more on your mortgage could affect other areas of your finances, such as savings.
- You may have difficulty qualifying for other types of funding. Lenders always evaluate your debt-to-income ratio. A higher mortgage payment eats up most of your monthly income. The lender may not feel comfortable and allow you to go through a certain amount of debt for a car loan or a personal loan.
When to consider a 30-year mortgage
Now let’s talk about when a 30-year mortgage might suit you better when buying an apartment.
If you can’t afford 15-year mortgage payments
In some cases, you may not be able to pay the monthly payment that comes with your 15-year mortgage — and that’s fine! Avoid financial problems.
If you give priority to other financial goals
We all have goals that require money in life, and home ownership is often just one of them. You may have an advantage in retirement savings, future costs of school for childrenor simply build a large emergency fund.
A 30-year mortgage can help you accelerate other financial goals, especially if you qualify for a low interest rate.
Advantages and disadvantages of a 30-year mortgage
- You will have a lower monthly payment. That way, you have more room in your budget to save on other things or solve financial problems.
- You could opt for a more expensive house. Extending your mortgage could allow you to borrow more than you could afford with just a 15-year mortgage.
- They could also more easily qualify for other types of loans. A 30-year mortgage will lower your monthly debt-to-income ratio.
- You can shorten the payback period with additional principal payments. This strategy reduces the time you have left on the mortgage. Adding an additional mortgage payment just for the principal each quarter or year can significantly reduce the amount of interest you will pay over time.
- You may not give priority to additional principal payments. While many homeowners think they will cut these additional payments by total interest, they are easy to forget or decide to spend the money elsewhere. As a result, it is very likely that you will pay additional interest over the years.
- As you get older, you will still repay the mortgage. If you buy your home at age 30, you will pay by age 60. With a 15-year housing loan, you would be without mortgages until the age of 45.
- Equity building takes longer. Home loans are amortized, which means that your previous payments are pre-paid for interest. Only a small portion actually goes to your principal until late in life.
If you’re not sure which type of mortgage is best for you, don’t be afraid to shop. You can learn how to do this by reading our article: How to choose the best mortgage for you.