If you are ready to buy a new home you may have already considered the impact of taking on a mortgage payment. However, you may not know the difference between a 15-year mortgage vs 30-year payment plan. There are many pros and cons to each mortgage, and for every homeowner, there are different needs to consider in the mortgage budget. It is important for the home buyer to take these factors into account and carefully plan their 15-year mortgage, or 30-year mortgage payment plan. If you decide that a 15-year mortgage is right for you, you can make your dream home a reality. First time home buyers who can afford a higher monthly payment may not know about the types of mortgages available to them. If you are ready to purchase a home and can afford to cut mortgage payment duration in half while saving thousands of dollars in interest. Of course, there are pros, and cons to both types of mortgages and you’ll need to know which mortgage works best for you based on your income, housing needs, and expenses including savings, and emergency accounts.
What Is a 15-Day Mortgage?
First-time homebuyers may not already know that mortgage terms can be flexible. Talking to a real estate agent may reveal that borrowing towards a conventional mortgage is not right for you. Many borrowers do not know if a 15-year mortgage is right for them until they do a side-by-side comparison of the pros, and cons of each option. Payments tend to be about 50 percent higher when compared to a conventional 30-year mortgage. There is no doubt that many homebuyers prefer lower payments however, defining a 15-year mortgage could mean paying $1,650 a month vs. $1,100 for a similar 30-year loan, for example. Homebuyers that choose a 15-year fixed-rate mortgage will pay off their home in about 15 years. If they make the payments on time, a 15-year mortgage comes that fixed rate that remains as long as the mortgage. Insurance payments and taxes will change over time.
Is a 15-Year Mortgage Right for Me?
As a home buyer, you can consider both types of mortgages. Learning more about the pros and cons of 15-year, fixed-rate mortgages vs 30-year mortgages can help you make the most out of the guidance you get from an agent.
The Benefits of a 15-Year, Fixed-Rate Mortgage
- Shorter Payment. A 15-year fixed-rate mortgage is a faster path to homeownership. It’s a great feeling when a homeowner owns their home outright within 15 years is appealing for people. Knowing your home can be fully paid off within such a short time frame offers a feeling of security and a huge weight off your shoulders. You may enjoy knowing that the home will be completely yours if you simply make larger monthly payments on time.
- Build Equity. Lower interest rates and a higher payment each month builds equity. A 15-year mortgage builds equity faster because you pay down the principal balance at a quicker rate. One of the pros of a 15-year fixed-rate mortgage is that homebuyers are able to build equity faster, which appeals to many people.
- Save Money. Mortgage lenders do not like to take on the risk however a 15-year mortgage allows them to charge a lower interest rate. That means that depending on the lender you may be able to obtain a mortgage rate that is anywhere from 1/2 to 3/4 of a percent lower than on a 30-year mortgage. If you desire a 15-year mortgage you may also notice lower interest payments because they are spread over half as many years as with a 30-year mortgage. You will, of course, need to factor in homeowner’s insurance property tax, or private mortgage insurance, and current interest rates.
Compare the principal and interest, for example:
- A 30-year fixed-rate mortgage at 3.88% has monthly payments of $1,176 plus a total interest of $173,471.
- A 15-year fixed-rate mortgage at 3.19% has monthly payments of $1,749 and total interest of $64,890 — a savings of $108,581!
The Cons of a 15-Year Fixed-Rate Mortgage
- Higher Payment. The monthly payments for a 15-year mortgage are usually 50 percent higher on average than a 30 year home mortgage. When you take on the higher payments, you have to remember that there are other costs including property taxes and insurance. If you think you could be hard to respond to personal emergencies, and the needs of your family with higher mortgage payments so not make the commitment. There is no way to reverse mortgage payments besides selling the home, refinancing, or foreclosure.
- Locked Equity. Building Equity faster still means that your money is tied up. While you have savings that you can access only by selling the house or borrowing with a home equity loan this is considered a con for some people. It is important that you know before entering into a 15-year home mortgage that the equity you have will still be essentially locked.
- Cost of Opportunity. Making the decision to spend your money on mortgage payments means that you realize the money will be unavailable for other investments. The cost of taking on this type of investment may mean that you are unavailable for stock investments, employee matching, or other accounts that require checking in return. This is also considered a con for some people interested in taking on a mortgage for a new home. It is important that you realize as a homebuyer you will need to take advantage of the cost of opportunity of a 15-year mortgage and ensure that the money you need is always available for the monthly payment.
- Less Buying Power. When you are paying off a 15-year mortgage it means that you will be paying higher monthly payments. Many people must change how much money they are able to budget for a property based on the monthly payment. Thus, most people consider this a loss of purchasing power when compared to a 30-year mortgage. For example, a growing family may choose a 30-year mortgage over a 15-year mortgage simply because they are able to make a commitment, and desire a more expensive home. This allows this type of family buying power giving them a better quality of life over the duration of their mortgage because their needs to match the qualifying ability of their payments. They may buy a home in a better neighborhood, spend the money on renovations, or pay the home off quickly making their money go farther by choosing a 30- year payment plan.
- Tax Disadvantages. A 15-year mortgage has two tax disadvantages that can be considered when compared to 30-year mortgages.
- Homebuyers lose the mortgage interest deduction faster if they pay their loan off in half the usual time.
- A 15-year mortgage has a lower rate which reduces the amount of interest paid when compared to a 30-year mortgage. This lower interest also means a smaller mortgage deduction.
If you are ready to take the next steps towards buying your next home, call the offices of Jeff Barchi. You can talk to a professional real estate agent in Glendale about the home buying process, and ask questions you have. If you are looking for the best mortgage lender, the team can help with that too so call, today!