If you’re getting ready to buy a house and looking around for home mortgages, a major question you’ll find yourself faced with is loan length: do you take the 15- or 30-year mortgage?
On paper, each term has advantages, but it will come down to your personal needs and capabilities when deciding on loan length. For first-time homebuyers, familiarizing yourself with the pros and cons of both 15- and 30-year mortgages will help you make the right choice.
Interest and Loan Length
When you have a fixed interest loan, you know what you’ll be paying every month for the life of the loan. During the early stages of your loan, your payments may be mostly interest; as your loan balance decreases, more of your payment will go to the principal amount. In a very basic sense, the longer you hold a loan, the more interest you will pay. Hence, a 30-year loan could mean you are paying double the interest paid on a 15-year term over the course of the loan length.
Look at your prospective lender’s mortgage rates, and you may find that 15-year terms have interest rates sometimes as low as a full point below longer-term loans. For your bank, it’s less risky to take on a shorter loan; hence, you’ll often find 15-year loans carry some of the lowest rates.
The benefit of a 30-year loan term is that you will have lower monthly payments–sometimes half as much as a 15-year term. If you are still early in your career or are growing a family, these lower payments now may be more important as you are expecting your income to grow along with your experience. Yes, you may pay more in the long run, but ideally, your financial situation will have improved so that you can pay more of the loan in the future. Check out amortization schedules for your potential loan to get a picture of your payments over time.
Because you can deduct your mortgage interest payments from taxes, a 30-year term will end up getting you greater deductions since you are paying more interest. However, it’s important to remember that these deductions are coming because you’re paying more–they’re not truly savings when compared to a 15-year loan.
When you’re young, that 30-year mortgage may allow you to own your first home; a long future of payments isn’t as intimidating when you know you’ll be working. However, for people approaching retirement, that longer-term loan becomes more daunting when living off social security payments or on a fixed income.
Your Future Plans
Are you saving up for future college tuition? Especially for growing families, keeping an eye on savings can be crucial. The lower payments of a 30-year mortgage may allow you to contribute more to these savings, starting right now. It’s important to calculate how much you’ll need to save, and for how long you’ll need to do so, and then compare those overall costs to potential monthly payments and total loan life. You may find that a shorter-term loan will free up your resources when the time comes that you need them elsewhere.
Not all home mortgages are the same, so first-time buyers should familiarize themselves with the options available. Answer a few questions here, and a home lending expert will contact you.