Loan Terms
Term: 15 Year vs. 30 Year Mortgages
Choosing between 15 and 30 year terms is not a simple decision. There are pros and cons to each:
- 30 Year Mortgages: You will make 360 monthly payments as the principal and interest repayment is amortized over the 30 year life of the loan.
- Advantages:
- Lower Monthly Payments: the cost of borrowing is spread out over a longer period so each monthly payment is smaller
- Easier Qualifications: lower payments mean that it's easier to qualify for the loan
- Borrow Larger Amounts: since the monthly payment is smaller (than for a 15 year), you can qualify to borrow a larger amount
- Larger Tax Deduction: because you are paying more in interest (than you would with a 15 year), you will get a bigger write-off on your taxes
- Greater Flexibility: with smaller payments, you can decide what to do with any additional income; invest it or pay off more of your loan principal if you want to build equity faster
- Disadvantages:
- Higher Interest Rate: 30 year loans generally have higher interest rates than 15 year
- Build Equity More Slowly: your payments for the first few years are mostly interest and so the percentage of principal you pay off each month is lower
- Higher Overall Cost: the higher rate paid for a longer period of time means that the final cost to own the property will be higher
- 15 Year Mortgages: These loans are not as popular as 30 year mortgages, but they are great if your focus is on owning your home sooner
- Advantages:
- Lower Interest Rate: 15 year loans generally have lower interest rates than 30 year loans.
- Build Equity Much Faster: A higher percentage of each (larger) monthly payment goes to paying off the principal, so you build equity in your home much faster.
- Lower Overall Cost: the lower rate paid for a shorter period of time means that the final cost to own the property will be lower.
- Disadvantages:
- Higher Monthly Payments: The loan has to be repaid in half as much time, so each monthly payment is larger
- Harder Qualifications: You need more income to handle the higher monthly payments
- Smaller Tax Deduction: Since you are paying less in interest (than you would with a 30 year), you will get a smaller write-off on your taxes
- Less Flexibility: You are locked into the larger payments and so have less to invest in potentially higher yielding stocks or bonds