30-Year or 15-Year Mortgage: Which is Best?
The overwhelming majority of mortgages in the United States are either a 30-year or 15-year mortgage. Obviously, the main difference is the life of the loan. Since each offer a variety of advantages and disadvantages, any potential homeowner should understand which type of loan is best. Even though they are similar in structure, key differences exist that can make a significant financial impact. In each case, the borrower pays interest calculated on an annual basis against the total loan.
30-year fixed-rate mortgages are extremely popular and make up the largest bulk of loans. They are particularly popular with first-time buyers as they come with lower monthly payments, which can then allow access to homes that otherwise might be out of reach. The drawback is the life of the loan and the interest that will accumulate over time to make the 30-year option much more expensive in the long run.
Since the term is much longer, the payment is interest-heavy on the front end. The principal shrinks much slower. As the loan creeps along, the majority of the monthly payment will shift over to principal. In this case, the borrower ends up paying twice the amount of interest – if not more – than they would under a 15-year mortgage.
There are a few ways around this, such as investing or saving the difference and paying the remainder of the loan off at year 15. Another way the 30-year can make financial sense is renting the property and passing the mortgage on to the renter, so to speak. Also, in many cases, owners sell and move long before the life of the loan is carried out.
One distinct advantage of the 15-year mortgage is the interest implications. It does make sound financial sense when considering the total interest paid over the life of the loan verses the 30-year. Also, in many cases the shorter-lived loan carries a lower interest rate, thus saving even more in interest paid. However, the major setback is that monthly payments can be much higher. The homeowner then has to weigh the effect of any lost opportunity costs – money for savings, investing, etc.
Each potential homeowner should take the time to weigh the options and decide which is right for them.