Loan : Most Important Decisions

15 or 30 years, Three Things to Consider

Perhaps one of the most important decisions to make about your loan will be whether you want to pay for 15 or 30 years. Statistically, the 30 year fixed mortgage has found the most favor amongst borrowers. The 30 year fixed rate mortgage allows borrowers to borrow more money as well as lower their monthly payment over a 15 year loan. After considering the amount that a borrower can pay monthly for PITI (Principal, Interest, Tax, and Insurance), it may be advantageous for the borrower to obtain a 30 year fixed rate mortgage in order to secure a lower monthly payment. For example, with a 30 year fixed rate mortgage amount of $250,000, and an interest rate of 6.5%, a borrower could expect to have a monthly payment around $1,580. The payment for a 15 year mortgage at the lesser rate of 5.9% would be $2,096 per month. The lower payment is obviously more attractive to the majority of borrowers.

There are, however, more factors to consider than just your monthly payment. With the help of a knowledgeable lender, you should carefully evaluate the following differences between the 15 and 30 year loan.

1. The higher cost of a 30 year loan. While it may have a lower monthly payment, the interest has 15 more years to work its magic on your loan. The cost savings in interests of a 15 year loan over a 30 year loan can be staggering. A buyer over years can expect to pay for their house in interest over three times!

2. The equity that you will have in your home during the course of each loan’s term. A 15 year loan will have a quicker equity build-up than a 30 year loan.

3. The extra $516/month in our example above. In the case of a 30 year mortgage, you would have an extra $516/month. With a wise investment strategy, it’s important to consider the present value of that money and if it could be leveraged for other investments.

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