When it comes time to start shopping for a mortgage, it’s often a 30-year loan that comes to mind.
After all, nearly 90% of homebuyers choose a 30-year fixed-rate loan, according to Freddie Mac. But that’s not your only choice. Some buyers opt for a 15-year loan that gets their mortgage paid off faster. Learn more in this overview of 15-year versus 30-year mortgages and decide which mortgage rate is right for you.
15-Year and 30-Year Fixed Mortgage Rates
Banks typically offer standard mortgage terms of 15 and 30 years, one of which is likely to work for most consumers. Regardless of the term they choose, consumers usually select a fixed rate. Whereas an adjustable rate fluctuates over time and might not fully amortize by the payoff date, a fixed rate keeps payments consistent over the life of the loan and guarantees that the loan will be fully repaid at the end of the term — no balloon payment to worry about.
15-Year Mortgage Loans
A 15-year mortgage is the favorite of financial guru Dave Ramsey. “I recommend 15-year mortgages, and never more than that, because the normalization of the 30-year mortgage has helped created a constant state of financial bondage for the middle class. It’s caused average, everyday people to lose hope of ever paying off their homes and being totally debt-free,” Ramsey said.
The major upside to a 15-year mortgage is it pays off your loan more quickly, so you pay less interest over the duration of the loan. And because a 15-year mortgage is less risky for lenders, you’ll also get a better interest rate. In fact, the average rate on Feb. 23, was 5.76% for a 15-year loan compared to 6.50% for a 30-year one, according to the St. Louis Fed. When you account for both the lower rate and the shorter term, that’s nearly $156,000 in interest saved on a $200,000 loan.
Because you pay down your loan faster with a 15-year mortgage, you also build equity faster. That makes it easier to take out a home-equity loan or line of credit to cover a major expense, do renovations or even purchase an investment property.
The downside to a shorter, 15-year mortgage is that the monthly payments are higher — about 42% higher compared to a 30-year loan in the same amount, using the same interest rate for an apples-to-apples comparison. As a result, you might have to settle for less house than you could afford with a 30-year loan and keep other expenses in check to avoid overextending your budget.
30-Year Mortgage Loans
The 30-year mortgage is the most popular for good reason. The longer term keeps your mortgage payments affordable and allows you to buy more house than you could afford with a 15-year loan. You might even have an easier time getting approved because your debt-to-income ratio, which measures the amount of your monthly debt payments against your income, will be significantly lower with a 30-year-loan, making you a less risky borrower.
The primary drawback of 30-year loans is that they’re more expensive. You’ll pay more interest over the life of the loan because you’ll be paying it for a longer period of time, and you’ll likely also pay a higher rate.
Another thing to consider is that a 30-year loan can tempt you to go over budget in your home purchase — especially if you think about affordability strictly in terms of the monthly payment and ignore the purchase price of the home. The monthly payment difference between a $200,000 mortgage loan and a $220,000 loan is “only” $126 a month, assuming a 6.50% interest rate. However, you’ll also pay over $25,500 more in interest over the life of the larger loan and perhaps suffer opportunity costs for tying up money you could have invested or saved in an emergency or retirement fund.
How To Save Money on Your 15- or 30-Year Mortgage
You have several ways to pay less for your mortgage no matter which term you choose.
Make a 20% Down Payment — or More
Larger down payments are better than smaller ones, and 20% is standard because that’s the amount needed to avoid having to pay for private mortgage insurance that benefits the lender, not you. A 20% down payment also means you borrow less money, reducing your monthly payment and the amount of time it takes to repay your mortgage.
Shop for the Best Mortgage Rates
The mortgage lending industry is highly competitive, so do your due diligence and shop around for the best mortgage rates. Even a few tenths of a percentage point can save you tens of thousands of dollars over the life of your mortgage loan.
Finding the right home takes patience, and so can finding the right mortgage. If you can’t find the right terms, then consider putting off your purchase for a few months. This can give you the necessary time to increase your credit score and save a larger down payment — both of which can save you thousands of dollars in the long run.
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Ryan Guina contributed to the reporting for this article.