When considering mortgage loans, most prospective borrowers know there are two basic types available on today’s market: fixed rate mortgages and ARMs (short for adjustable rate mortgages). Both types of mortgage loans come with specific subtypes, classified based on their length and other factors. It’s usually a good idea to have at least a basic grasp of what is mortgage length and how the distinct types of loans will suit your budget, housing needs, and purchase power.
How to choose between a 15- and a 30-year mortgage
As far as house loans go, fixed mortgages are without a doubt the most popular type: they make up 75 percent of residential loans nowadays. Their defining trait is that the interest rate remains constant throughout the duration of the loan. In terms of length, the existing types of home loans are usually available for terms of 10, 15, 20, 25, and 30 years. 40 year mortgage loans are also available, but they’re hard to find, since they’re more expensive than 30 year loans and don’t go too long a way in terms of lowering your monthly payments.
It almost goes without saying that, of all the above, the 30 year fixed rate mortgage is the most widely preferred, though there are several aspects worth considering, in the 15 vs 30 year mortgage debate:
- 15-year mortgages come with higher payments, but less money spent on paying off the interest for the loan. In the long run, 15-year home loans will also build equity faster.
- 30-year mortgages will take a smaller tow on your personal budget, on a month-to-month basis. However, for the longer term, you obviously end up paying far more.
It goes without saying that, in order to decide what the best option for you is, you should use one of the many online mortgage rate calculators available both from lenders, as well as from finance advice portals. By crunching the cold hard numbers, you’ll understand that the final option should take more into account than just the arithmetic of it all. Consider
- How much money you’ve got saved up in your emergency account. If you’ve managed to accumulate a comfortable amount in savings, then spring for the 15-year mortgage. Bear in mind that the larger the payment, the less wiggle room you’ll have, should you happen to fall on hard times with unforeseen expenses;
- How much money you’ll afford to save for your retirement, in both scenarios. If retirement is still a long way away (several decades), then you can afford to invest aggressively. Whatever you choose, your retirement account should remain a priority, so make sure you can afford a 30-year mortgage if retirement is still a long way away. If it’s less than 15 years away, you’re probably better off paying the mortgage early;
- How high your tolerance of financial risk is. Some people prefer avoiding all debt altogether, while others will be able to work a certain degree of calculated risk within their approach to personal finance. Remember to also take risk-adjusted returns into account, when considering mortgage length. Most 30-year fixed rate mortgages with a 5 percent interest rare will yield lower returns than an index fund portfolio, especially after tax deduction. By and large, it all boils down to how well you can tolerate risk. Springing for a 30 year term might pull in higher returns, but it does purport a higher risk than simply paying off your mortgage. Consider whether you prefer peace of mind or potentially higher financial gains from investment instruments;
- How disciplined you are about your bills – especially about debt. Chances are… you’re not, according to a Federal Deposit Insurance Corporation survey, which says most borrowers (97.3 percent) will consistently fail to pay more on their mortgages. You can take out a 30-year fixed rate mortgage, for instance, and pay it off in 15 years. Your interest will go up a little, but you’ll still end up paying less. Consider your attitude toward your savings: if you’ve accumulated a safety cushion, take a 15 year term into account; if not, go for 30 years.