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Most home buyers know about the 30-year fixed-rate loan, but with interest rates so low right now, many home buyers and those looking to refinance are asking themselves if they should be considering a 15-year fixed rate loan. What are the advantages and disadvantages to both types of loans? The more information you have, the better decision you will make.
What is the Difference?
Both 15-year and 30-year fixed rate loans allow the borrower to repay the loan at a steady rate. Your total mortgage payment will consist of the principal and the interest payment plus insurance and taxes which may vary slightly each year. As more of the principal gets paid, the loan will have a lower interest payment. Eventually, the final payment will be 100% principal and no interest, along with insurance and taxes. The primary difference between the two is the amount of the principal and the length of time it takes to repay the loan. For example, a 15-year fixed loan will have 180 total payments, while a 30-year fixed loan will have 360 payments. If you borrow $100,000, the 15-year loan payments would be higher on a monthly basis than the 30-year loan because you are paying more of the principal each month in order to pay it off in a shorter time frame.
What About Interest Rates?
The interest rates on a 15-year fixed rate loan tend to be lower than on the 30-year fixed rate loans. Why? Think about it from a private lender's perspective: if they are loaning you money for 15-years, there is less likelihood that you will default on that loan over the long haul. While a lot can happen in 15-years, 30-years means the private lender is assuming a lot of risk.
What Are the Pros and Cons?
30-year fixed rate loans tend to have lower monthly payment and, of course, a longer life. This makes the monthly payments much lower than a 15-year loan. For most new homeowners, this makes debt repayment more affordable. This may also allow the homeowner to qualify for a larger loan. The biggest disadvantages to this type of loan is that the homeowner will pay more in interest over the life of the loan and will build equity much more slowly.
On a 15-year fixed rate loan, borrowers tend to pay lower interest rates, and in the long run end up spending less money on interest payments to the private lender for the same amount. The 15-year fixed rate loan also allows you to build equity in your home faster. For those who find making higher monthly payments to be too big of a challenge, they may be able to qualify for borrowing a lower amount.
Which One Is Right for Me?
Determining which type of loan is right for you will ultimately depend on your situation and level of comfort when it comes to repayment. If you are looking to build equity in your home quickly, pay it off faster, and don't mind higher monthly payments, the 15- year fixed mortgage may work for you. Additionally, if you are closer to retirement or are refinancing your current home, consider a 15-year loan. A 30-year loan is a great option for those just starting out on the home buying journey and may have other debts to pay or are trying to save for the future with lower monthly payments. While these are just some factors to consider, you should consult with a professional to help determine what the right strategy for your unique situation is.
Please note, by refinancing your existing loan, your total finance charges may be higher over the life of the loan.