15-year vs. 30-year Mortgages – Which is Better?
For many, your house is more than the place you live. It is your largest investment, and your way of securing a better financial future for yourself and your family. It is this investment potential that pushes people to buy instead of rent, because they want the money they spend on the home to come back to them in the near or distant future.
Current statistics on mortgage products
According to the American Banker’s Association, 47% of all home loans were 30-year mortgages, compared to only 17.6% of homeowners that elected for a 15-year mortgage. Yet according to most experts, these numbers should be reversed.
Why do people choose 30-year mortgages?
In the current economic climate, many homeowners prefer the idea of lower monthly payments in order to reduce the financial pressure they feel month to month. By stretching a home loan out for 30-years, their monthly payments decrease dramatically.
If you opt for a 15-year mortgage on a $300,000 home at 4.5% interest, your monthly payment will be expected to be around $2,295. But on a $300,000 home at 5% interest, the average monthly payment drops dramatically to only $1,610 per month. That’s a “savings” of $685 per month.
For many families that are concerned about their finances, saving $685 per month is incredibly tempting.
The costs over the long-term
However, for those families that can afford to pay a little bit more, the difference between a 15-year mortgage and a 30-year mortgage is substantial.
- First, most lenders offer a lower interest rate on a 15-year mortgage than on a 30-year mortgage.
- Second, the time spent accruing interest is reduced by a significant margin, thus decreasing the total amount you spend on the loan.
Using those same numbers above, the homeowner that elected for a 15-year mortgage will end up paying roughly $113,000 in interest, for a total investment of $413,000. The homeowner that elected for the 30-year mortgage will end up paying $279,767 in interest, for a total investment of $579,767.
Over the course of the loan, the homeowner that elected for the longer terms will pay more than $150,000 more than the homeowner that chose the 15-year mortgage for the same home.
What can you afford?
If you are in the process of buying a home and you are unable to afford the costs of a 15-year mortgage, then a 30-year mortgage may be the most advantageous. But if you can budget for a 15-year mortgage and are looking for your home to be more of an investment, a 15-year mortgage may be a better choice.
For more information about 15-year and 30-year mortgages, please contact me today!