When obtaining financing, many soon-to-be-homeowners are faced with the dilemma:Â Should I opt for a 15-year mortgage or a 30-year mortgage?
Well, there are pros and cons to both. And ultimately, it’s up to you to decide what’s best for you and your personal situation. Let’s dive in a take a look at some different scenarios.
A 30-year mortgage can give you a low monthly payment and maximize your monthly cashflow
30-year mortgages typically come with a lower monthly payment and a higher interest rate than 15-year mortgages. What does this mean? Over the course of your loan, you will actually be paying more money in the end, but for the short-term, you’ll have more money in your pocket each month.
For example, if you borrowed $300,000 using a 30-Year Fixed Rate mortgage (at 4.69%), your monthly payment would be approximately $1,554.11 per month. Meanwhile, with a 15-Year Fixed Rate mortgage (at 4.14%), your monthly payment would be closer to $2,240.17 per month.
If you went with a 30-year loan in the scenario above, this would leave you with an extra $686.06 per month. So, what could you do with this extra money each month? Well, you could do a lot of things including:
- Save the cash for a downpayment on an investment property
- Use the cash to invest in index funds
- Contribute towards your kids’ 529 Plan
- Buy a bigger house
- Purchase that pony you’ve been eyeing since you were a kid
What are the benefits to a 15-year mortgage?
There are a couple of benefits to a 15-Year Fixed Rate Mortgage, including:
- You get a lower interest rate
- You pay of your home twice as fast, which enables you to pay off debt quicker
- You end up saving a LOT of money in interest over time
How much can I really save with a 15-year mortgage?
So, how much money could you hypothetically save in interest? Well, let’s take the same scenario above and compare a 15-year Fixed Rate Mortgage with a 30-year Fixed Rate Mortgage:
| Loan Type | Loan Amount | Interest Rate | Monthly Payment | # of Payments | Total Interest | Total Cost |
|---|---|---|---|---|---|---|
| 30-Year Fixed | $300,000 | 4.69% | $1,554.11 | 360 | $259,480.41 | $559,480.41 |
| 15-Year Fixed | $300,000 | 4.14% | $2,240.17 | 180 | $103,230.57 | $403,230.57 |
As you can see, the loan amount is the same. But, with the higher interest rate and low payments on the 30-Year Fixed Rate mortgage, you end up paying an extra $156,249.84 in interest over the course of the loan! In the long term, a 30-year mortgage ends up being a much more expensive loan when compared to the 15-year loan.
So, which one should I choose?
The choice is up to you. Each person and their financial situations are different. To some people, it may make sense to choose the 30-year mortgage, while to others the 15-year makes more sense. Here are a couple of things you can consider when deciding which choice is best for you:
- How does a 15-year or 30-year mortgage impact my short-term goals?
- How does a 15-year or 30-year mortgage impact my long-term goals?
- If choose a 30-year mortgage, what can I do with the difference in the monthly payment (assuming I can make up the difference).
- What are my current priorities as it relates to my family?
- What does my spouse think?
As always, when making such an important decision, it’s a great idea to also discuss these ideas with your financial planner or your mortgage lender.
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