So, you’ve found the home of your dreams and now you’re ready to buy it. What’s next? Time to choose a mortgage.
According to the web site, Wisebread.com, mortgage loans come in all shapes and sizes, including a standard 30-year, fixed-rate mortgage, and mortgages with interest rates that adjust yearly.
There’s also the 15-year, fixed-rate mortgage. It comes with an interest rate that doesn’t change and is lower than the one you could get with a 30-year loan. However, because this loan has a shorter term, it also comes with a higher monthly payment, the web site suggests.
You might ask, ‘Should I consider a 15-year, fixed-rate home loan? The answer is possibly. There are pros and cons to this type of mortgage, the web site suggests.
The Pluses
Here are some of the pluses to a shorter-term mortgage loan:
You Will Pay Less Interest
For example, here’s how it may play out if you take out a mortgage loan for $200,000. If you take out this loan as a 30-year, fixed-rate mortgage with an interest rate of 4.10 percent, you will pay more than $140,000 in interest if you take the full three decades to pay off your loan, the web site suggests.
Consider, instead, you take out that $200,000 as a 15-year, fixed-rate loan with an interest rate of 3.25 percent. You would pay under $53,000 in interest if you paid off this mortgage over its full term, the web site suggests. This equals a savings of about $87,000 in interest.
Your Interest Rate Will Be Less
You pay less in interest on a 15-year, fixed-rate loan for two reasons. One, the loan is paid back in half the time and you pay off a greater amount of its principal balance with each monthly payment. Next, 15-year loans come with lower interest rates than 30-year versions because you aren’t holding the bank’s money for as long, the web site suggests.
Wisebread.com adds: “According to the Freddie Mac Primary Mortgage Market Survey, the average interest rate on a 30-year, fixed-rate loan stood at 3.78 percent as of September 2017. The survey showed the average rate on a 15-year, fixed-rate loan was 3.08 percent during the same time frame.”
If getting the lowest possible interest rate is of chief importance in your book, a 15-year, fixed-rate mortgage is a good option, it adds.
You Could Free Up Your Money Faster
Because the term is cut in half, you could pay off your mortgage faster if you go with the 15-year. Once you’ve paid off your mortgage loan, you’ll be able to spend or invest the dollars that instead went to your lender, the web site suggests.
Just know many homeowners never pay off their loans in full. You might refinance your 15-year loan to another type long before you pay it off. Or, you could even sell your home and move before you reach the end of your term, the web site suggests.
The Minuses
Here are the negatives to a shorter-term mortgage, suggested by Wisebread.com:
Your Monthly Payment Will Be Higher
Because you pay off a 15-year mortgage in half the time as you would a 30-year version, your monthly payments will be higher.
How much higher you ask? If you take out a $200,000 30-year, fixed-rate mortgage with an interest rate of 4.10 percent, your monthly payment, not including property taxes and homeowners insurance, would be about $966.
If you take out that same $200,000 in the form of a 15-year, fixed-rate loan with an interest rate of 3.25 percent, your monthly payment would be about $1,400, again not including property taxes and insurance, the web site suggests.
True, it might sound good to eliminate all the extra interest payments that come with a 30-year loan. However, if you will have trouble making the monthly payments that come with a 15-year loan, the shorter-term mortgage is not in your best interest, the web site suggests.
Less Flexibility
If you’re concerned about the higher monthly payments of a 15-year mortgage, but also worry about paying too much interest over the life of your loan, you can take out a 30-year, fixed-rate mortgage and pay a little extra toward your loan’s principal balance monthly, the web site suggests.
Also, if there’s a month where extra money isn’t an option, you can make your required mortgage payment without sending extra cash toward principal, the web site suggests.
Keep in mind though, if you take out a 15-year mortgage, you must make the higher mortgage payment monthly. You don’t have the option of paying less. If your budget is tight, or if you’re struggling with high amounts of other debt, the smaller payments of a 30-year loan probably make more sense, the web site suggests.
