March 30th, 2015
When it comes to buying a home, the options available for the length of the mortgage can be confusing. While many choose to go with the standard 30-year option, the 15-year mortgage does provide many benefits that may make it a better option for you.
15-Year vs. 30-Year Mortgage: What Is the Difference?
Besides the 15-year option being half the time of the 30, there are other differences that need consideration when choosing which option is best for you. One major difference between these two mortgages is that the monthly payment on the 15-year will be more than what the 30-year will be. However, the shorter duration also means that you will pay less interest over the life of the loan. For example, based on the current rates, if your loan is for $200,000, and you are paying 1.75 points with 30% equity, you would end up paying $333,443 over a 30-year fixed loan with a payment of around $926 per month. For the same home with a 15-year fixed rate, you would only pay $248,436, but your monthly payment would be around $1,380.
Benefits of a 15-Year Loan
There are several benefits for opting for a 15-year loan. As you are cutting the loan duration in half, you are drastically lowering the amount of interest you will pay. Using the same example from above, on a $200,000 home, you will pay over $85,000 less over the course of the loan since you are paying only half the amount of interest compared to the 30-year loan. Another major benefit is that you will be paying the home off quicker, which also means that you will build equity faster as well.
When paying a 15-year fixed loan, the payments include principal and interest, and are scheduled each month. This means that you will know exactly what you will need to pay every month over the course of the loan, and you won’t have deal with a large balloon payment that can be substantial. The lack of the balloon payment also means that you won’t have to refinance the home just to pay the balloon payment, which is common with many 30-year loans.
Who Benefits Most from 15-Year Fixed Loans?
Many can benefit from choosing the shorter loan duration, but generally, first-time home buyers may benefit the most. First-time buyers can often take advantage of considerably lower down payments, with some being able to pay only five percent down. For those who want to refinance their homes, the 15-year fixed can allow for refinancing up to 95% of the value of the home.
Generally, younger home buyers also see a greater benefit since they will have the home paid off well before retirement. This means that you won’t be trying to pay the higher monthly payment on the loan out of Social Security benefits, which are often considerably lower than what you made while working. This provides peace of mind that you will be able to make the payments throughout the loan, providing you maintain the same level of pay for employment.
There are essentially two major disadvantages of 15-year fixed rate mortgages. The higher monthly payment is the most important consideration. The second disadvantage is that the loan will be fixed rate. This means that the only way you can take advantage of any lower interest rates is by refinancing your loan, which can be expensive.
A 15-year fixed rate mortgage provides significant benefits, but the monthly payment will be considerably larger than the 30-year option. If you can comfortably afford the payment, and there are no foreseeable changes in income in the near future, it may be the perfect option for you.
Want more options? Call Summit Funding today to learn more, (985) 635-4696.