You have applied for a mortgage and are now faced with a question: Should you get a 15 year mortgage or a 30 year one? How are they different and what benefits would they have for you?
Each length of mortgage has its own pros and cons that are dependent on your current circumstances, like where you are in your life and your finances. Here is what you need to know about the differences between a 15 and 30 year fixed mortgage:
Before You Begin, Consider Your Current Financial Situation
Before you take the plunge, please consider your current financial situation before applying for a loan:
- How much are you paid each month?
- What are your monthly debts and bills?
- What is your credit score?
- What are your savings and other investments?
A mortgage calculator can help you get an idea of how much you can afford per month, but always seek the help of a professional financial advisor and mortgage loan officer. They will help you understand your finances and find the right mortgage for you.
Always budget responsibly before taking on large financial burdens like a mortgage.
30 Year Mortgage: Lower Payments
If you opt for a 30 year mortgage, you will have lower monthly payments, but obviously a longer pay-off period. This option is a good choice if you plan on being in your home long term, for example, if you are a young family just starting out.
In fact, 30 year loans are considered the most popular. According to Investopedia, in 2015 more than 2/3 of all mortgage applications and 86% of all purchase applications were 30 year.
15 Year Mortgage: Less Interest
There is less interest on a 15 year mortgage, but your monthly payments will be larger than a 30 year. A 15 year mortgage can benefit you if you are close to retirement and do not want the responsibility of a mortgage in retirement.
30 Year Mortgage: More Investment In Personal Savings
Because your monthly mortgage payments are lower, a 30 year mortgage allows for more investment in your personal savings, as well as being able to pay off debts like student loans and credit cards.
By having a financial cushion from saving up, you can invest in other opportunities like home improvement or remain secure if your financial situation changes due to hardship like unemployment or illness.
15 Year Mortgage: Build Equity Faster
Since you will be paying more per month and in less time with a 15 year mortgage, you will have the advantage of building up your home’s equity faster than a 30 year mortgage. Then, you can use that home equity as you need, be it a home improvement or paying for college.