While every mortgage is a little different, one thing most home loans have in common is that they come with a 30-year term. However – it’s not the only choice. Another popular option is the 15-year mortgage.
What are the advantages and disadvantages of the 15- and 30-year mortgages, and which is right for you?
30-year Mortgage
A gold standard in U.S. real estate is the 30-year fixed mortgage, which gives homeowners the predictability and affordability of a home loan designed to be paid off over 30 years.
Key advantages:
- Affordable monthly payments: The longer the term of the loan, the lower its monthly payments.
- Focus on other money goals: Lower monthly payments means you can put cash into other savings and investment vehicles, like a college account for the kids or an Individual Retirement Account (IRA).
- Inflation buffer: Ten, twenty or thirty years in the future, your monthly payment will look much lower than it does today, thanks to inflation.
- Nicer home: Spreading loan payments over more time means you could afford a more expensive home, while still getting reasonable monthly payments.
- Tax benefits: Homeowners on a 30-year mortgage can often take advantage of tax deductible interest payments in the early years of the loan.
- Option to pay sooner: If your mortgage allows early payment, you could pay it off sooner and reap some benefits of a shorter term loan, with the flexibility of lower monthly minimums.
Possible disadvantages:
- More costly: A longer-term loan means a higher interest rate, bumping up your final homebuyers price tag.
- Delayed full ownership: Homeowners who like the idea of owning their home outright, with no obligations to the lender, may prefer a shorter term loan.
15-year Mortgage
A 15-year fixed-rate mortgage lets homeowners reduce their total interest owed, by paying off the loan sooner via higher monthly payments.
Key advantages:
- Less expensive: Savings with a 15-year mortgage can be significant – around $70,000 on a $200,000 home, depending on the specifics of your down payment and interest rates.
- Faster ownership: Some homeowners appreciate the peace-of-mind that comes from knowing they own their home outright.
Possible disadvantages:
- Higher monthly payments: Homeowners on a 15-year mortgage should be prepared for steeper monthly payments, and have a backup plan if financial situations change and a payment can’t be made.
- Less financial flexibility: With money tied up in higher monthly payments, homeowners are less able to invest in other financial vehicles where their savings could grow.
- Harder to qualify: Borrowers must prove they are able to make higher payments.
- Fewer tax benefits: Because there’s less interest to pay off, there’s less to deduct from taxes – so homeowners on a 15-year mortgage don’t get the full extent of tax benefits available.
What’s Best for You?
While a 15-year mortgage is effectively less expensive, there are many advantages to a 30-year mortgage that could ultimately make it a smarter financial choice. Speak with a lender you trust about what options you qualify for, and what makes the most sense for your financial means and goals.
