Buying a home is one of the most expensive things you will ever do in your lifetime.
That’s why it is important to consider your options when applying for a mortgage. While there are a multitude of options available, people seem to pick between the two most famous choices: a 15-year and a 30-year mortgage. CORE Finance Group broke down these popular options to help you understand the difference between them.
You can go for a more relaxed payment term and pay off your house in a span of three decades, or you can fast-track things a bit and finish your mortgage in just 15 years. There are multiple factors you can look at to know which mortgage suits you best. If you need some insights on things you need to consider before deciding on which mortgage to apply for, we’ve laid out a few pointers for you!
Choose a 15-year mortgage if you want…
Lower Interest Rates
Banks see 15-year mortgages as less risky compared to 30-year loan terms because things are more unpredictable in the duration of a longer mortgage term. That’s why 15-year loans typically come with a quarter-point to a whole point lower interest rate than 30-year loans. You may think that’s insignificant, but it adds up over time. Remember that we’re talking about decades of mortgage payments here.
Choosing a 15-year mortgage can make your overall loan much cheaper than the usual 30-year payment term. Yes, your monthly payments will be higher but you are going to save thousands if not hundreds of thousands of dollars in loan payments by finishing off your mortgage early. It could very well make a few years of tighter finances more worthwhile.
Forced Savings
Even though you are not putting your money towards typical investments such as the stock market or investment accounts, you are still investing your money in your property. Historically, real estate tends to appreciate in value. Your savings are then placed in building the equity of your home. Your fully paid property is still going to be one of your major assets later on in life. When it comes to it, you know you’ll have a wealth of equity to tap into for major expenses. Having a large amount of equity can even help you apply for a second mortgage.
Peace of Mind
Homeownership is a goal for many, and opting for a 15-year payment term can make it happen in a much shorter period of time. Obviously, your home would be yours faster than choosing to pay for it in three long decades. Not only do you stop monthly payments early, but you can sleep soundly at night knowing that you have a stable roof over your head. It will relieve you of one of the biggest financial responsibilities most Americans have.
You can also rechannel your funds to bigger things that you didn’t think were possible during the time you were burdened with such a heavy obligation. You free yourself from a major debt much sooner.
Choose a 30-year mortgage if you want…
Lower Monthly Payments
You are stretching your payments for a longer period of time, therefore significantly decreasing your monthly payments. This can help you stick with a better payment scheme because the burden won’t be too heavy. Simply put, you are sure that you are paying for something that you can afford. There are fewer risks of missing payments and incurring penalties.
Comfortable Cash Flow
Lower monthly payments would also leave you with more wiggle room for your finances. This comes in handy for emergency situations. You won’t feel too cash-strapped during unforeseen circumstances because there’s more money to go around.
If you don’t have the extra money to begin with, the much lower monthly payment can help you put your money towards building your emergency fund. Experts advise saving at least 3-6 months of your typical monthly expenses for emergency situations. The pandemic has emphasized the importance of having that extra money to tap into. It is always wise to have funds available to better help your family during times of distress.
Save Up for Retirement
Redirecting your finances for early retirement is also one of the benefits of a shorter payment term. The amount you’re otherwise paying for a 15-year mortgage can be channeled towards your retirement account. Financial advisors tell most people to go via this route when managing their finances. As you near paying your house in full, you’re also assured that you have a fund that can help you out later in life.
Flexibility to Pay Your Mortgage Faster
If you opt for a 30-year mortgage, you have more flexibility to increase your monthly payments. You can choose to pay half the amount every two weeks instead of monthly. That would constitute 13 months’ worth of payments instead of 12. Depending on the amount of the loan, you are looking at a significant number of years to chop off from your payment term.
Since your required minimum payment is lower, it would be easier to allocate funds toward your mortgage. You can comfortably rechannel extra bucks from a salary increase or investment returns. Even without a refinance, you can actually pay off your mortgage early by adding on top of your regular monthly dues.
If you need help choosing the mortgage that is right for you, contact us. We would love to help.
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