Both loans offer stability: they have fixed rates that don’t change throughout the life of the loan. They also have equal monthly payments arising from these unchanging rates. For this alone, 30-year and 15-year fixed-rate mortgages are staples among today’s consumers.
But between the two-fixed rate mortgages, which is a better option? Should you go for longer (30 years) to afford monthly payments or shorter (15 years) to pay off your loan faster?
Let’s try to find answers to these questions, considering each option’s rates and payments.
30-Year Fixed-Rate Mortgages: America’s Favorite?
The 30-year mortgage rates have come a long way averaging 7% on April 2, 1971, to 3.94% as of Dec. 7, 2017, per the Federal Reserve Bank of St. Louis, using data from Freddie Mac.
Against the backdrop of the Great Depression, fixed-rate mortgages were born as an alternative to short-term and variable-rate loans.
And within the fixed-rate mortgage family, one variant stood out and became popular over the years, the 30-year mortgage.
A $300,000, 30-year mortgage with an interest rate of 3.94% requires a monthly payment of $1,421.89. For all the 360 payments to pay off the loan, this amount (principal and interest) remains the same.
The 30-year mortgage is a safe bet for homeowners looking for stability and affordability, looking forward to spending many years of living in the home.
Are 15-Year Fixed-Rate Mortgages Catching Up?
What does the 30-year mortgage lack that the 15-year has?
First, 15-year mortgages have rates lower than on 30-year mortgages. Using Freddie Mac data for the same period, the 15-year mortgage rates averaged 3.36%.
If you apply that to the $300K mortgage example, the monthly payment becomes $2,124.08. You ask, “How is this $2K monthly payment affordable than the $1.4K?”
On the 30-year mortgage, you’ll pay a total mortgage with interest of $511,879.72. With the 15-year, the total mortgage with interest is just $382,334.72.
The higher payments on the 15-year FRM make it faster to pay it off. This leads us to its second winning point: faster buildup of equity.
Because a bigger portion of the 15-year loan payments goes to the principal every month as opposed to the 30-year’s interest-heavy initial payments, a homeowner can build equity faster.
Substantial equity is wealth for the homeowner who can get cash out of it to pay off credit card debts and more.
Your Goals, Your Mortgage
While deciding on either mortgage is a tough choice to make, you can simplify things by identifying your goals:
- Do you plan to be free and clear of mortgage debt, at least by the time you retire? Your option is the 15-year mortgage. The catch: higher monthly payments.
- Do you intend to stay in the home for a long time and go for easy-to-budget payments? The answer lies in the 30-year mortgage. But expect a slower buildup of equity.
Do you need more help to decide? Speak with a lender today.