The vast majority of homebuyers choose a 30-year fixed-rate mortgage – about 90 percent, according to Freddie Mac, the Federal Home Loan Mortgage Corporation. Should you do the same?
A mortgage with a 30-year term comes with several advantages, but a 15-year fixed-rate home loan can be a smart solution for some homebuyers. The following overview of both options should help you decide which mortgage term best meets your needs.
30-Year Fixed-Rate Mortgages
The primary reason many homebuyers go with 30-year mortgages is the lower monthly payment. The amount due can be hundreds less, and for many, that has a huge impact on the decision.
However, lower mortgage payments aren’t the only advantage of a 30-year term. The other benefits include:
- The potential to take out a larger home loan
- The opportunity to build up savings while buying a home
- The freedom to pursue other financial goals
Why wouldn’t you want a 30-year mortgage? This type of home loan typically comes with a higher interest rate and, in many cases, additional fees. Plus, the principal balance shrinks quite slowly – and all of these combined means that borrowers with longer-term mortgages pay more in the long run.
15-Year Fixed-Rate Mortgages
Lenders view 15-year mortgages as less risky, so they generally offer lower interest rates. The difference can be up to a full point less, and over time, that adds up to significant savings.
The total cost of interest with a 15-year home loan can be tens of thousands less. And, the shorter term has other merits, including:
- The ability to build home equity fast
- The shorter route to full homeownership
- The chance to retire with a home paid off
Why wouldn’t you want a 15-year mortgage? The higher monthly payments may not be as doable, and paying more towards a home loan means having less for other expenses and investments. And borrowers who opt for 15-year terms qualify for less expensive properties than they could with a longer mortgage term.
Which Mortgage Term Should You Choose?
If you can afford higher monthly home loan payments, you may want to go with a 15-year mortgage. But doing so could leave you vulnerable to financial troubles, particularly if you don’t have much in savings.
As such, some experts recommend choosing a 30-year term – then, assuming the loan has no prepayment penalties, make the payments of a 15-year schedule. That way, if times get tough, you can cut your expenses by going back to the lower payments of the longer-term schedule.
Keep in mind, too, that you have other term options. You can find fixed-rate mortgages with terms of 10, 20, 25 and 40 years. And, of course, you can always consider an adjustable-rate loan.
Need some expert advice? The professional team at Intercap Lending is here to answer all of your questions about home loans and your financing options. For a free, no-obligation mortgage consultation, contact our Orem, Utah, office today.