Congratulations on deciding to buy a new house. If you are a first-time home buyer or have decided to buy a new house and read this article, you might be thinking about a 15-year mortgage vs a 30-year mortgage. If this is the case, then you are in the right place.
How are 15- and 30-year mortgages different?
The key difference is the period in which a person can repay the loan. As the terms indicate, in a 15-year mortgage, you have to pay back your loan in a shorter timeframe, while in a 30-year mortgage, you have to pay back your loan over a longer period.
In addition, the interest rate in a 15-year plan is a little higher than a 30-year loan, but the total interest you pay is greater for the longer loan because you pay more interest over the loan’s lifespan. Lastly, a 15-year loan is less risky for lenders and home loan companies as the loan duration is half that of its direct competitor.
What are the pros and cons of each choice?
The pros and cons of 15- and 30-year mortgages are as follows.
What Are The Pros Of A 15-Year Mortgage?
- Total sum of interest is less compared to longer plans
- Get rid of loan and own the house within 15 years
- Get rid of PMI (Private Mortgage Insurance) sooner by reaching 20% equity faster
Cons Of A 15-Year Loan
- Higher monthly payment
- Huge burden on your monthly budget
- You may not get the kind of house you want
- Less affordability due to a high monthly payment
Pros Of A 30-Year Mortgage
- Lower Interest Rate
- Smaller Monthly Payment
- Longer Repayment Period
- Higher Flexibility—you can make extra monthly payments to pay off the loan faster
What Are The Cons Of A 30-Year Loan?
- Higher interest rate
- Higher total interest payment
- Takes a longer time to build equity
Are There Any Disadvantages Of A 15-Year Mortgage?
The biggest disadvantage of a 15-year mortgage is that you have to pay a higher monthly payment that can affect your monthly budget and limit your investment and other goals.
What Are The Trade-Offs Of One Option Over Another?
On a 15-year repayment schedule, you have to pay back your loan within a shorter timespan at a higher interest rate, but the total interest payment is less than a 30-year mortgage. In contrast, in a 30-year repayment plan, your monthly payment is low, but the total interest payment is higher as it is stretched over 30 years.
When Should You Choose One Option Over The Other?
This depends on your financial situation, credit score, down payment, and how much you want to save monthly. If you have more monthly income and can pay a bigger chunk of money both upfront and each month, a 15-year plan might fit you the best. However, if you are tight on budget and want to pay less for your monthly payment, a 30-year mortgage is a better option for you.
If you are a first-time home buyer visiting a lender, broker, or home loan company, you need to be aware of all the pros and cons of 15 and 30-year loans to make an informed decision. Also, talk to your financial advisor before making the final decision.
Blackmon Home Loans is a top firm of Las Vegas mortgage brokers. First-time homebuyers and other customers will find the expertise they need to choose the right home and mortgage. Contact us today to get started with a pre-approval.