How Long of a Mortgage Should You Get?
The number of decisions that you have to make when buying a house can make your head spin. Not only do you have to decide which house you want to buy, but you also have to choose which mortgage is right for you.
When it comes to mortgage lengths you can choose from 15 years or 30 years. While the difference may seem obvious, many people don’t even consider what the difference means and if it could benefit them.
The Difference Between the Two
The obvious difference is that the 30-year mortgage has a 15-year longer term than the 15-year mortgage. However, it is important to understand what that means for your payment.
15-year loans allow homeowners to pay off their mortgage faster allowing them to own their house outright. It also rewards buyers with a lower interest rate.
This can sound great to some buyers, but it is important to remember that even with the lower interest rate due to the shorter term the monthly payment will be substantially higher than that of a 30-year mortgage. As the homeowner, you only have half the time to payoff the total loan amount.
Advantages to a 15-Year Mortgage
15-year mortgage loans will take more out of your monthly budget now, but it will payoff in the long run. Consider a buyer that obtains a mortgage for $240,000 at the average rate of 3.68. If the loan is a 30-year loan the buyer will end up paying a total of $456,708.
However, if they were to select a 15-year mortgage at the average rate of 2.69%, they would only pay a total of 351,993. That means the buyer would save over $100,000 in interest over the life of their loan.
Other Options
Saving all that money in interest and owning your home in half the time sounds appealing to many buyers, but the thought of coughing up that much extra each month to make payments might not be possible.
If you are looking at mortgages and are concerned about affording the larger 15-year payment you still have options. Many lenders offer 30-year mortgages with no prepayment penalty fee. That means you can obtain a 30-year mortgage, but make additional principle payments each month to payoff the loan faster.
You might not be able to pay the house off in 15 years, but you may be able to pay enough extra to have it paid off in 20 or 25 years. That would still be 5 to 10 years of not having to make mortgage payments and being able to own your house that much sooner.
Studies have found that 86% of buyers opt for the 30-year mortgage, but that doesn’t mean you need to. Talk to your lender about your options and how much each of them will cost you. If you do opt for the 30-year mortgage, consider making additional payments when you can to save money down the road and own your home faster.