Should you get a 15-year or 30-year mortgage? Both have their pros and cons, so let’s look at a few things to consider as you debate your options.
15-Year Mortgage vs. 30-Year: Monthly Costs
The main reason most people choose to do a 30-year mortgage is the overall monthly cost is lower. This is attractive since it means you can spend that money on other things. For example, you can spend that money you save on upgrades for the home. Or if it needs a lot of maintenance work, you’ll now have the extra funds to take care of those things.
Lower costs also mean less risk of being unable to pay your bills. If your income gets cut and you lose your job, it’d be easier to pay a 30-year mortgage than a 15 year. Obviously we always hope there is a steady income coming in and we don’t lose our jobs, but nothing is guaranteed.
So why choose a 15-year mortgage? Because even though the costs are much higher, you’re also building equity much faster in the home. By definition you’re paying off the home in half the time, so you’re on a faster track to becoming debt-free. Some people who choose to get a 15-year mortgage say it was a struggle at first, but they’re later glad they did it because they build so much equity in the home.
15-Year vs. 30-Year Mortgage: Interest Rates and Payments
Something else to consider is interest on the mortgage. 15-year mortgages have two advantages in this department:
- Your rates are usually 0.50% lower
- You pay much less over the course of the loan
Lower interest rates on a loan are pretty much always a good thing. It means you can borrow the same amount of money but pay less in the long run.
This combines well with the fact that you pay off the loan faster. Each month more of your payment goes into paying the principal of the loan. For a 30 year mortgage, a higher percentage of your early payments are going towards interest. Less interest means you essentially pay less to own your home outright, so you are keeping more of your hard-earned money.
15 vs. 30 Year Mortgages: Opportunity Costs
The last thing to consider is the opportunity cost of choosing one type of mortgage over the other. 15-year mortgages let you pay less over the long run, so it can be very attractive. But the lower monthly payment of a 30-year mortgage opens doors for you to spend money elsewhere.
For example, the lower monthly payments mean you can invest more in the stock market. With a rate of about 10% per year, that’s better than the usual increase of home values.
Another option is investing in a small business. Many people have side-hustles, and putting a few dollars into helping it grow may be a better payoff than paying down your home mortgage faster.
Conclusion
There are advantages and disadvantages of 15-year and 30-year mortgages. While a 15-year mortgage lets you pay less overall for the home, a 30-year mortgage’s lower payments can make you breathe a little easier and gives more options for other investments. For some more personalized advice, send us an email at Team@RyanGrantTeam.com or call us at (949)-651-6300. We look forward to hearing from you.