What is the Difference Between a 15 and 30-Year Mortgage?

If you’re ready to buy a home, you are likely planning to take out a mortgage. Mortgages vary in length. Two common options are short-term mortgages, which have 15-year terms, and long-term mortgages that have 30-year terms. Both have different terms and advantages. A mortgage lender can help you choose the mortgage that best fits your financial situation and goals.

Before you decide whether to get a shorter 15-year mortgage or choose a 30-year mortgage, it helps to understand the main differences. A short-term mortgage is structured to be fully paid off in 15 years. That includes the principal plus any interest payments. A 30-year mortgage, on the other hand, is paid off in 30 years. While both have interest payments, interest rates are lower with 15-year mortgages. However, your total monthly payments are higher with a 15-year mortgage Las Vegas compared to a 30-year mortgage.

A 15-year loan is a fixed-rate loan, which means that you’ll pay the same amount each month, and you know what that amount will be when you take out the loan. Regardless of external factors, such as market interest rates or inflation, the loan’s rates will not change. Many people choose 15-year mortgages because they have lower interest rates than 30-year loans and they can be paid off faster. Because a 15-year mortgage has higher payments every month, it is often more difficult to qualify for than a 30-year mortgage.

Pros

There are certainly some advantages to getting a shorter-term loan, including:

• Lower interest rates
• Reduced interest payments
• Equity
• Fast track to home ownership
• Savings

Of the mortgage structures available, 15-year mortgages have lower interest rates compared to 30-year mortgages. Short-term mortgages have fewer interest payments overall. A 15-year loan is also an optimal choice for building equity more quickly in your property due to the fact that you pay down the principal amount faster. If you do need to sell your home, your mortgage is less likely to go underwater. Short-term loans can also put you on a faster track to home ownership, as you will become the full home owner once you’ve made the last loan payment. Finally, another benefit of a 15-year loan is savings. Lenders face less risk with a 15-year loan compared to a 30-year loan. As a result, they charge you less in interest, and those savings add up. If you buy a home for $250,000 and make a 10% down payment, you’ll pay a total of $57,226 in interest for a short-term loan with a fixed-rate mortgage of 3.13%. In contrast, if you get a 30-year loan with a fixed-rate mortgage of 3.61%, your interest payments will amount to $143,719.

Cons

On the flip side, there are some disadvantages to taking out a 15-year mortgage, too.

• Larger payments each month
• Opportunity costs
• Home affordability

Between the interest and principal payments, you’ll pay about 50% more each month for a 15-year mortgage compared to monthly payments for a 30-year loan. That doesn’t include other housing-related expenses such as insurance and property taxes. If your down payment is less than 20%, you’ll also need to account for mortgage insurance payments. Since more money is devoted to monthly loan payments, you’ll have less savings available for other investments like retirement contributions or home upgrades. Finally, you may be more limited in price range for a home if you know that you’ll be making larger payments up front.

Like a 15-year mortgage, a 30-year mortgage follows a monthly payment schedule. A 30-year loan is a fixed-rate loan, which means you will know every month exactly what you owe in mortgage payments, and there are no surprises from changing variables such as fluctuating interest rates. Longer-term loans are generally more popular with home buyers, especially people purchasing a first home. In 2018, 3.6 million loans were issued for a duration of 30 years. In comparison, just 165,000 15-year loans were issued that year.

Pros

There are some advantages worth considering for a 30-year loan, such as:

• Lower payments
• Flexibility
• Predictability
• Tax deductions
• More expensive home

Since your repayment period is longer with a 30-year loan, your Las Vegas mortgage rates will be lower and more affordable. For that reason, 30-year loans are more popular with first-time home buyers and home owners who are concerned with their overall budget. Another advantage of a 30-year mortgage is flexibility. While you can make your scheduled monthly payments as planned, you also have the option of making higher payments so that you can pay off the loan more quickly. Since you are getting a fixed-rate mortgage, your monthly payments will be immune to changing market conditions and other economic factors. A 30-year loan allows you to claim larger tax deductions, and you can also shop for homes with a higher price tag since you won’t be paying as much for the house every month.

Cons

As with a short-term loan, there are some drawbacks to think about as well:

• Higher interest rates
• Slow equity growth
• Overborrowing

Since lenders face a higher risk of people defaulting on their loans Las Vegas, they charge more in interest for a 30-year loan. As a result, you’ll pay more over time in interest. It can take longer to build equity in your home, and you run the risk of buying more home than you can afford based on the prospect of lower payments.

When choosing a loan, you’ll need to make some other considerations as well. First, you will need to determine which type of loan you can qualify for. You should also keep your other financial goals in mind, such as planning for a child’s education, your retirement, medical expenses, and more.

For assistance selecting a loan, contact an expert loan officer in Las Vegas today.