Which is Better — A 30-Year or 15-Year Fixed Mortgage?

in Buying a Home, First Person: Our Blog, Mortgage, Personal Finance

Choosing the best mortgage option really depends on your situation and your financial goals.

The most common conventional mortgage program is a 30-year fixed rate loan. As the name implies, with a fixed rate mortgage, the interest rate is set at the time you take out the mortgage and remains constant over the life of the loan. The monthly payment level also remains constant. Knowing what your payment will be can be reassuring.

Before you commit to a 30-year loan, consider other factors. How long do you plan to live in the home? By what age do you want to be debt-free? With a shorter 15-year fixed mortgage, you will have paid off the mortgage loan and you’ll own your home free and clear after only 15 years. You’ll also pay less interest over the life of the mortgage. The down-side is that your monthly payments will be higher because you are amortizing the loan over half the time period.  Usually, the interest rate on a 15-year fixed mortgage will be lower than the rate on a 30-year mortgage, even from the same institution. Consider these two scenarios:

15-year mortgage 30-year mortgage
Mortgage amount $100,000 $100,000
Interest rate 3.5% 4.25%
Monthly payments $714.88 $491.94
Total monthly payments over the term of the mortgage $128,679 $177,098
Total interest paid over the term of the mortgage $28,679 $77,098

This information is for illustrative purposes only. The information shown above is designed to provide basic information about mortgage financing. Interest rates will vary based on your individual situation.

While paying your loan off in half the time may sound appealing, we understand not all homeowners can afford the higher payment with a 15-year loan. An alternative is to make extra principal payments on a 30-year mortgage. Each monthly payment is comprised of interest and principal. When you make extra payments to principal, you can pay off the loan sooner. Calculate how much faster you’ll own your home by making extra principal payments — just make sure your loan program permits extra payments to principal before you close!

Choosing the term of a fixed rate mortgage is generally related to the monthly payments you can afford, how anxious you are to pay off the entire mortgage and any rate difference with the different terms. Adjustable-rate mortgages may offer savings in certain situations as well.

If you still aren’t sure which plan is best for you, contact one of our experienced mortgage loan officers with any questions or to discuss your options.