Mortgage loans are one of the best options when it comes to opting for a loan facility or home purchase loan to buy a house. Most of the times, individuals will not have enough money to pay for their dream homes in a single go. Mortgage loans are an aid to such a situation and helps homebuyers choose to invest in their dream house. There are a range of bewildering variety of mortgage loans available for homebuyers. However, it is important for the prospective homebuyers to practice the best one for them.

Home purchase loans can be opted for a period of either 15 years or 30 years. However, the 30 years mortgage loan remains to be the prime financial instrument for most of the Americans opting for their first-time homeownership. However, the matter of fact is that most of these buyers could be served better if opted for the 15-year fixed-rate mortgage.

Both these loan facilities are structurally similar with the basic difference is terms of their applicability period. The 30 year mortgage makes the monthly payments slightly more affordable, while the 15-year mortgage minimizes the overall costs in the long run.

15-Year vs. 30-Year Mortgage: An Overview

As a borrower, if you aim at paying off your mortgage as soon as possible, while your credit score makes you capable of affording higher monthly payments, the 15 year mortgage loan is a perfect choice for you. However, if you wish to opt for lower monthly payments and keep your finances less overburdened and free for other investments, the 30-year mortgage loan is your deal.

Borrowers have to pay lower interest rates for the 15-year loan option as compared to the 30-year loan option. The shorter-term duration also shortens the risk associated at the lenders’ end. The shorter term makes way for faster payment of the principal amount while the 30-year period helps in building your equity faster.

As far as the advantage criteria between a 15-year loan vs a 30-year loan is concerned, borrowers with a 15-year term will have to pay more amount monthly as compared to a 30-year loan term. In return, 15-year loan options offer a lower interest rate, along with payment of the loan amount within half the time, saving a lot of money.

Does the mortgage term impact your cost?

A mortgage loan is basically a term loan type which is secured in lieu of real property. For every term loan, the borrowers need to pay a calculated interest amount based on the annual calculation against their outstanding balance under the loan withdrawn. Under this, the calculated interest rate, and the required monthly payment, both are generally fixed.

As the monthly payment remains fixed, the interest portion and the principal pay might change over time. As the loan amount is high, in the beginning, most of the payment made by the borrower is just the interest calculated. However, with the ongoing repayment, the balance reduces, thereby reducing the interest share and increasing the principal share.

A shorter-term loan option will lead to higher monthly payment, which means the 15 year mortgage loan is slightly less affordable. But, due to the shorter loan repayment term duration, it benefits and goes cheaper on several aspects. In fact, if compared, a 30 year mortgage loan is expected to end up costing even double the loan value when opted for 15-year mortgage loan.

30-Year Mortgage

  • The 30 year mortgage loan option leads to shrinking of the balance very slowly which might be almost twice as long for the same amount of loan. Also, the decline in the principal balance in 30 years loan is way slower as compared to 15-year loan.
  • As the interest rate goes higher, the gap between the two mortgage loans increases.
  • The prime advantage of this loan is that the monthly payment burden is relatively low.
  • With the lower payment amount, borrowers have the option to buy more houses in a 30 year cycle as would be possible with a 15-year loan option as the monthly payment is way higher in a 15-year loan period.
  • The lower payment gives way to the borrower to add up their savings.
  • Almost 90% of first-time home buyers opt for 30 years mortgage loan.

15-Year Mortgage

  • Under the 15 year mortgage loan facility, borrowers must pay quite less at the end of the day as compared to the 30 years old cycle.
  • There are government-supported agencies who back most of the mortgages, imposing additional loan-level price adjustments fee leading to making the 30-year mortgage more expensive. These adjustments are not applied on 15-year loan facility.
  • Even the Federal Housing Administration charges higher level of mortgage insurance premiums for the 30-year borrowers.

The Bottom Line

Making a choice between a 30-year or 15-year mortgage loan is solely depended on the impact on your finances in the coming decades. It is always recommended to crunch your financial liabilities and evaluate the numbers before making your final decision. If you are aimed at paying off your loan as soon as possible, along with the readiness of paying a higher monthly payment, the 15 year mortgage is a perfect choice for you. However, if you have challenges on monthly payments and need a lower monthly payment amount, opt for a 30-year loan. This will automatically decrease your liabilities and help you concentrate your freed funds for other financial goals.