Which is better: A 30-year fixed-rate mortgage or go for a lower-interest 15-year one?
Typically, 15-year mortgage allows you to pay off your mortgage quicker and save a significant chunk of money on interest. However, a 30-year may be a logical choice for most people because it has more advantages. Let’s take a look at the differences:
- Payments are less with a 30-year mortgage which enables more consumers to qualify for home purchases.
- Generally, you can make additional principal payments to pay off your loan faster without penalty.
- A 15-year loan means you are committed to giving that extra money to your lender each month, whether you can really afford to at the time or not.
- The higher payments of a 15-year mortgage make little sense if they keep you from building savings or contributing to a 401(k) plan, IRA or college fund.
- The amortization schedule of 30-year fixed is back-heavy, with early-term payments big on interest and light on principal.
- A 15-year fixed is always light on interest which lowers its taxpayer benefits.
While it’s true you gain more of a tax break from a 30-year loan, it shouldn’t be the main consideration when deciding on a term. The 30-year borrower pays less in yearly taxes because they pay significantly more in interest.
So it all comes down to choice and circumstances:
- Choose the 15-year loan if you have the financial wherewithal to assume the payments. Your interest savings will be substantial and you’ll own your home faster.
The 30-year loan offers lower payments and greater flexibility. You can always choose to pay more on your mortgage when the money is available.