Which Mortgage Is Best for You: A 15-year Mortgage Or A 30-year Mortgage

09.15.2020 | Category: Homebuying

For many prospective home buyers, choosing the right mortgage product is the first step toward achieving homeownership, which can feel overwhelming.

Although the 30-year fixed-rate mortgage is most often recognized by prospective buyers, it is not the only option available. The 15-year mortgage product can offer unique benefits and advantages that may help a prospective homebuyer achieve their goals by best matching their financial needs.

The 15-year fixed-rate mortgage is a great option for homebuyers with the right financial profile, who have the ability to make higher payments each month. A 15-year fixed-rate mortgage may allow these homebuyers to pay off their mortgage sooner than a 30-year mortgage and enjoy lower interest rates.

The 30-year fixed-rate mortgage was chosen by 90% of homebuyers in 2017, and is often viewed as the American standard for mortgages. The lower monthly payments are appealing to many buyers, although homebuyers will ultimately pay more because of accrued interest over 30 years.

It’s helpful to begin the home-buying process with a complete understanding of what is possible with different types of loans and payment options, and how finances will be impacted. Considering the differences between each type of mortgage when buying a home can make choosing a mortgage a more seamless experience.

To calculate monthly payment schedules and interest payments homebuyers can use the Mutual of Omaha Loan Payment Calculator.

Reasons why a 15-year mortgage loan may be the best choice for homebuyers

15-year fixed-rate mortgage loans are ideal if a prospective homebuyer is seeking quicker repayment terms, and 15-year fixed-rate mortgages often have lower interest rates. These shorter term mortgages may also offer financial freedom earlier than other mortgage types.

The Top 6 Advantages of 15-Year Fixed-Rate Mortgages:

• A 15-year mortgage allows homebuyers to pay off the principal in a shorter time, which allows homebuyers to gain financial freedom earlier, and free up money for other needs like education and retirement.
• The interest paid will be much lower than that for a 30-year fixed-rate mortgage, despite higher monthly payments.
• Home equity will accrue more quickly with higher monthly payments.
• Interest rates are often lower because lenders absorb less risk when funding loans with shorter terms.
• The lower loan-to-value ratio can mean that refinancing is easier.
• A 15-year fixed-rate mortgage can make selling without a loss more likely.

30-year fixed-rate mortgage loans are a popular option, but may not be the best financial choice for all buyers in the long term.

Pros:

• Longer term loans often mean lower monthly payments, allowing homeowners to set aside money for other financial obligations.
• Assuming there are no penalties, a 30-year mortgage can be paid off with extra payments.
• The smaller payments may make managing mortgage payments easier for some homebuyers.
• Homebuyers will typically qualify for a larger loan amount when applying for a 30-year fixed-rate mortgage.

Cons:

• Homebuyers will pay more interest over the life of the loan because of the lower monthly payments and length of the loan.
• Interest rates could be higher because of the risk to lenders.
• Slower home equity growth.
• There is a risk of over-borrowing because of the lower payment, which can lead to homebuyers having trouble affording future issues like home maintenance costs.
• Homebuyers won’t have the advantages of a paid-off home for many years, unlike with a 15-year mortgage.

What are the differences between conventional and FHA 15-year and 30-year mortgages?

An FHA 15- or 30-year fixed-rate mortgage is an option for homebuyers, often first time homebuyers or Millennials, who may not have the typical means to buy a house or who live in an area with high housing costs.

Understanding the differences between conventional and FHA mortgages can be helpful when shopping for a mortgage.

• FHA loans are insured by the Federal Housing Administration, while conventional loans aren’t insured by any federal agencies and some conventional loans will require borrowers to get private mortgage insurance (PMI) in the event of a default.
• FHA loans are available with down payments as low as 3.5%. Although conventional loans may also allow these minimum down payments, the financial threshold for homebuyers is higher and PMI will be required.
• FHA loans are available to homebuyers with credit scores in the high 500s. Conventional lenders comfortable with low down payments may require homebuyers to have credit scores beginning in the high 600s and significant savings.
• FHA loans must be used for a primary residence, and inspections are more stringent than with conventional loans. Conventional loans can be used for investment and vacation properties.

Deciding on a 15-year fixed-rate mortgage loan versus 30-year

When a homebuyer is choosing between a 15-year fixed-rate mortgage or a 30-year fixed-rate mortgage they must consider which mortgage better matches their needs. These needs include long-term goals like how long the homebuyers intend to stay in the home, cash on hand for a down payment and other expenses like PMI and home renovations.

A 15-year mortgage may be a better fit for a homebuyer who can financially manage high monthly payments, and is interested in eventually refinancing or quickly paying off their mortgage loan principal. The type of home being sought and the homebuyer’s other monthly financial obligations are also important considerations.

This shorter term 15-year fixed-rate mortgage can be the path to financial freedom earlier than a 30-year mortgage. The possibility of lower interest rates and less interest paid over time can be very appealing for homebuyers that have the financial means to qualify for a 15-year mortgage. Speaking with an experienced mortgage lender will help homebuyers find the best mortgage for their circumstances.