After all the trouble of finding a house, comes the trouble of paying for it. You may have saved up enough for a decently sized down payment, but you’ll still need to take out a mortgage. When you do, you’ll have to decide between a 15-year loan or a 30-year. There are pros and cons to both; which do you choose?
The 15-year Savings
The most obvious advantage to a shorter repayment life is the lower cost if interest. Because you’re paying more per month, the loan gets paid off sooner, which means less interest gets capitalized. We’re not talking about a low amount, like $200. It’s much more significant than that.
A $150,000 mortgage at 4% interest, over a 15-year loan, means you’ll be paying just over $1,100 a month, and you’ll pay $50,000 in interest by the time it’s paid off. The exact same loan, with a 30-year repayment, nets you a $760 monthly payment, but you’ll pay $125,000 in interest.
The numbers are clear; a 15-year mortgage saves you thousands in interest… if you can afford the monthly payments. Take into consideration the costs of food, utilities, and other expenses, to make sure you’re not living paycheck to paycheck. You also want to make sure your income is secure; if you may become unemployed or be hit with a lower income, it will be safer to go with a 30-year loan.
You must also consider how long you’re planning to be in the home. If you won’t be living there for 15 years, or long enough to pay off the loan, why bother with the higher monthly payments? 15-year loans are for houses you plan to spend a long time in.
The 30-Year Freedom
Again, a 30-year loan means a higher monthly payment, but more savings in the long run. However, some people can take the temporary savings month-to-month and invest it to save more that way. There’s risk involved in this path, and you have to take the time to do it right, but it has the potential to earn you enough to pay for the extra interest costs.
With a 30-year loan, you can also claim the mortgage interest deduction on your taxes for 15 extra years. If you’re planning on retiring while living in the home, you won’t be qualified for some tax deductions anymore, so this one will be especially useful.
If you’re still not sure which term to go for, choose the 30-year, because you have the option of prepayment. You can pay an extra $100 per month, or even pay the 15-year amount, or even more. It will shave thousands off in interest, as well as years off the loan. And the best part? You’re not locked-in to pay that amount. If you’re having a hard month, you can always switch back to the minimum, no questions asked. However, you do want to check with your lender; some will hit you with a penalty for prepaying.
The Bottom Line
Interest rates shouldn’t be the only factor for choosing your loan. Look at the big picture; you can build equity faster on a 15-year loan, but you may sacrifice your other financial goals to do so. A 30-year loan gives you more freedom, but it’s also a debt burden you have to carry for a very long time. Talk about it with everyone who will share the burden with you, and do a lot of research on your providers before you choose.