How to Choose Between a 15-Year and 30-Year Mortgage

One of the most important aspects of taking out a mortgage to buy a home is making sure the terms of the loan best suit your financial needs. It is not only about the lowest possible interest rate, but also about choosing the right mortgage term.

The term of the mortgage indicates how much time you have to pay off your loan in full. The two most common home loan maturities, where borrowers typically have to choose between 15 and 30 year mortgages, although some lenders will offer you terms as short as eight or 10 years.

These 15-year and 30-year mortgages each have their own pros and cons, so it’s important to make the choice that best suits your financial goals.

Below, Select takes a closer look at the trade-offs between 15-year and 30-year home loan terms and what to consider when deciding between them.

In general, the longer the term of your loan (or the term of the loan), the lower your monthly payments. That’s because borrowers pay off their home loans in fixed, equal monthly payments over the life of the loan — someone with a longer time horizon will get smaller payments compared to someone with a shorter time horizon for the same loan amount.

Rocket Mortgage, one of the largest home loan lenders in the US, uses an example of a $240,000 home loan with an interest rate of 4% to illustrate this point. If the borrower chooses a 30-year term, they make a monthly payment of $1,145.80 including principal and interest (insurance and other charges are not included in this case). However, if they choose a 15-year loan term, the monthly payment is $1,775.25 — that’s a difference of more than $629.45 per month.

If you assume you don’t have enough headroom in your monthly budget to take on a larger mortgage payment, it might make more sense to opt for a 30-year term so you can have smaller monthly payments over a longer period of time.

A major disadvantage of a 30-year mortgage is that you have to pay more interest over the life of the loan. Not only will you be charged interest for a longer period of time, lenders will usually offer slightly higher interest rates for this option – the quicker they can be paid off in full the better, given the risk that you may default on your payments , will be smaller.

Some borrowers may be reluctant to the idea of ​​paying more interest over time and may prefer to save on those fees by paying a slightly higher amount each month. If saving on interest is most important to you, a 15-year mortgage might be a better fit for you.

If you’re looking for a lower interest rate on your mortgage, make sure you also have good credit when you apply and consider one of the top mortgage lenders, like Rocket Mortgage and SoFi.

Home value is a measure of how much of the property you actually own. Think of it this way: when you take out a mortgage, you make a down payment, but you pay the lender back the loan they gave you to buy the house.

For example, if you only put down a 10% down payment on a $400,000 property, the lender essentially owns more of it than you since you only paid 10% of the home’s value. As you continue to make your mortgage payments over the years, you will eventually own more of the property than the lender, and so you will build equity in your home.

Having a significant amount of equity in your home can come in handy when you decide to take out a home equity line of credit or HELOC for major renovations or other big expenses. You can also use your home equity through a HELOC as a down payment on an investment property, so building equity earlier can also help meet certain goals faster.

The higher your monthly mortgage payments, the faster you can build your equity — another reason why a 15-year mortgage may be more attractive to some borrowers.

A major benefit of the 15-year repayment term is that you can pay off your house 15 years earlier than if you opted for the 30-year mortgage.

Being mortgage free means you have more room in your budget for other things – some homeowners may want to pay off their house as soon as possible so they can buy a second property and focus on paying off the mortgage instead.

Other people may just be emotionally uncomfortable with debt and prefer to get rid of it as soon as possible. Keep in mind that while assuming a 15-year term to be mortgage-free sooner, you can come with a slightly lower interest rate and more money overall for interest, but in return you’ll have to make higher monthly payments.

If you want to build equity faster and save on interest but can’t commit to making higher monthly payments on a 15-year mortgage, you can try making additional mortgage payments to pay off the loan faster. This works best as long as your mortgage lender doesn’t charge a prepayment penalty for prepaying the loan.

If you’re still a few years away from starting your home purchase, it can still be helpful to contact some mortgage lenders so you can learn more about the financial steps you need to take to be in an ideal position to buy your home to be .

For example, if you really want to take out a 15-year mortgage, but your current income doesn’t allow you to make higher payments, a mortgage lender might suggest that you save more money and get a better-paying job so you can afford it .

If you’re still not sure where to start when it comes to finding a lender to work with, Select has rounded up a few that will meet a variety of needs. Ally Bank, for example, does not charge lender fees, which can help borrowers save some money up front during the home buying process.

Chase Bank, among other popular lenders, also offers a jumbo loan option for those who may need to borrow more than $647,000 to buy their home.