We believe in giving our clients options for their mortgages. Whether you need a bank statement loan, a VA loan, a conventional loan, or a creative solution for your investment goals, we love to be the source of our clients’ financing solution.
One of the question many borrowers have is whether a 15 year or 30 year term is better for them. Most mortgage offer these two different time frames, and as you might expect there are pros and cons to both. Here are some things to keep in mind as you decide which is the better fit for you.
Monthly Payments
This biggest impact of a 15 year versus a 30 year mortgage is going to be your monthly payment. Cutting the loan term in half is going to save you money in interest, but will naturally increase your mortgage payment. Without oversimplifying, this is basically the decision you need to make: is it a higher priority for me to save money in interest over the life of the loan or to keep more of my monthly income available?
Let’s look at an example. For a $300,000 loan at a 4% interest rate:
- A 15-year mortgage might have a payment of $2,219 per month.
- A 30-year mortgage could result in a payment closer to $1,432 per month.
In this case, the 30-year option frees up roughly $787 per month, which could be useful for other financial priorities. However, the trade-off is the long-term cost.
Interest Rates
Another significant difference between the two mortgage options is the interest rate we can offer. We can typically offer lower interest rates for 15-year mortgages, often around 0.5% to 1% less than a 30-year loan. This means you’ll pay less in interest overall and potentially save thousands of dollars over the life of the loan. A lower interest rate reflects the reduced risk for lenders since the loan is repaid more quickly.
While the interest rate for a 30-year mortgage is higher, it gives you more flexibility. The increased interest rate reflects our increased risk, as it takes longer for the loan to be paid off and market conditions might change during that time. Nonetheless, with a longer loan term, you’re able to keep your monthly payment low, which could make a significant difference to your budget and the affordability of the investment.
Tax Implications
Keep in mind that your taxes will be impacted by the mortgage you choose. Mortgage interest is tax-deductible, which can affect how you view the cost of a longer loan. Because you’ll pay less interest overall with a 15 year mortgage, you’ll have fewer deductions related to mortgage interest over time.
With a 30-year mortgage, the higher amount of interest paid annually can lead to larger tax deductions, particularly in the early years of the loan. However, you’ll also carry the debt for a longer period, which means extended reliance on that tax deduction.
Freedom vs. Flexibility
It really comes down to deciding between freedom and flexibility. Both a 15 year and 30 year mortgage have perks. The 15 year mortgage represents freedom, because you’ll own the home outright in half the time. If you’re focused on financial freedom and minimizing debt, a 15-year mortgage is an excellent option. You’ll pay off the loan quickly, leaving more room in your budget for retirement savings, investments, or other financial goals once the mortgage is paid off.
On the other hand, a 30 year loan gives you more flexibility. If flexibility is more important to you, a 30-year mortgage may be the better choice. The lower monthly payments can free up money for other purposes right now instead of 15 years from now, such as investing, building an emergency fund, or managing living expenses. We find that this can be particularly appealing for first-time homebuyers or those with limited income.
Just like most financial decisions, choosing which loan length is best really comes down to your personal budget, needs, and goals. We have decades of experience helping our clients determine which loan terms are the best fit for their unique scenario, and we are ready to help you, too.
Ready to learn more about applying for a mortgage? Contact us any time.