A 30-year mortgage costs more than a 15-year mortgage. You may be able to save money in the long run if you take out a 30-year mortgage. Is a 30-year mortgage bad? Should you always get a 15-year mortgage? Before deciding on the length of your mortgage, it is important to evaluate your own financial situation and goals.
Is it possible to get a 30-year mortgage and later change it to 15 years? It could help you build equity quicker and save on interest payments over time.
Many people face common questions when shopping for a home. It’s important to do your research before buying a home.
Is A 15 or 30 Year Mortgage Better?
The 15-year and 30-year home loans have strengths and weaknesses. Before making a decision on which type of home loan is best for you, it is important to consider all of your options.
So, what’s the difference?
Here’s the deal:
- A 15-year mortgage requires a higher monthly payment, but you will save a lot of money over the life of the loan. The result is that you will be able to pay off your loan sooner and build equity in your home. You will own the home sooner. You can become a homeowner sooner if you make your monthly payments on time.
- A 30-year mortgage costs more in the long run, but you would pay a lower monthly payment. It can be beneficial for people who don’t have a lot of money.
Let’s look at a $250,000 loan to see how this concept might play out in reality:
I used the same 4% interest rate for both the 15-year and 30-year loans to calculate the monthly mortgage payments. The price difference will be seen when we change the term of the loan from 15 to 30 years.
| 15-year mortgage | 30-year mortgage | |
| Monthly Payment | $1,849* | $1,194* |
| Total interest paid | $82,860 | $179,674 |
| Total paid (principal + interest) | $332,860 | $429,674 |
*Please note: Monthly payments shown here do not include your home insurance, property taxes, mortgage insurance or other homeowners association fees.
15 Year Mortgages Have Better Interest Rates
It is possible for a lender to give you a lower interest rate on a 15-year mortgage than it is on a 30-year loan. You may end up paying more over time due to the shorter loan term.
You would save more than the chart indicates. You can save up to 50% off the original price. A 15-year loan at 3.5 percent would cost $71,697 in interest and a monthly payment of $1,787. If you took out the same loan for 30 years, the interest and monthly payment would be the same.
You could save $100,000 by getting a 15-year mortgage instead of a 30-year one. This could be a great way to save for the future.
Most of us would take a 15-year loan to save a hundred grand. It is possible to build wealth over time if you invest the money saved from the loan.
Why would you take out a 30-year loan? A 30-year loan gives you the ability to spread out your payments over a longer period of time, making them more manageable and allowing you to access more money for a larger purchase.
Simply put: If you can’t comfortably afford the monthly payment for a 15-year loan — or if you worry the higher payment on a 15-year loan would cut too deeply into your financial freedom — a 30-year loan may be right for you.
Is A 30-Year Mortgage A Bad Idea?
You will pay a lot more in interest if you get a 30-year mortgage instead of a 15-year one. Before deciding which type of loan is right for you, it’s important to crunch the numbers and consider your financial goals.
The question to ask is this:
Is this extra $100,000 paid over 30 years worth it? If the benefits of this extra payment outweigh the costs, it is a worthwhile investment.
Why A 30-Year Mortgage Might Be Better for You
Only you can decide if it’s worth it, but here’s what you may be getting:
More Financial Flexibility
By saving hundreds of dollars a month on your 30-year loan’s house payment, you’d be able to put this money toward other areas of life, including:
- Saving for Emergencies:
You should have an emergency fund with at least three months’ worth of household expenses in case you lose your job or get injured or sick. Saving on your house payment could help. You can put the savings into this fund to help you reach your goal. - Saving for Retirement:
If a 30-year mortgage loosens up more money in your budget, you could put it into an IRA for retirement. During retirement, this will give you some tax breaks. You can save money by taking advantage of the tax breaks. - Investing :
Whether it’s in a CD, with a robo-advisor, or through a brokerage house, spending less each month on your house payment could free you up for investing elsewhere. Your home is a big investment, but it isn’t the only one.
You Can Afford A Better Home
The cost of a 30-year mortgage may be worthwhile if it opens the door to a better house in a better neighborhood. It is important to consider the long-term benefits of a 30-year mortgage before making a decision, such as the ability to build equity and invest in a more desirable area.
If you want to buy a less expensive home, financial advisors say you should get a 15-year loan. It is hard to argue with the logic of hard numbers, but real-life can be distilled down to simple numbers.
If a 30-year mortgage allows you to buy a home you couldn’t otherwise afford, your home’s higher value and appreciation could cut into the extra financing charges. Your home’s equity will increase over time, which could be a major financial benefit.
It’s Easier to Qualify
Mortgage lenders will take a look at your entire financial life before issuing a loan. They want to know how much you make and how much you owe. It’s important that you give accurate information so that your creditor can make an informed decision.
If your debt-to-income ratio is too high, you won’t be able to get a mortgage. Before you begin the loan application process, it’s important to carefully evaluate whether or not a 15-year mortgage is a feasible option.
You can still buy a house even if you don’t qualify for a 15-year mortgage.
You would pay more in interest over 30 years, but at least you would be getting into a home of your own.
The added expense of a 30-year loan doesn’t have to be the final word. There are other options that can help people save money on their mortgage. There are ways to cut into that expense. By exploring different options, such as budgeting and shopping around for the best deals, you can make significant savings on your extra expense.
How to Save Money On a 30-Year Mortgage
When you close on your mortgage, your lender will be required to show you a There is a truth in lending report.
The report will show you how much you will pay for your home based on the interest and payment schedule of your mortgage. Property taxes, insurance, and maintenance costs will not be included in the report.
If you were borrowing $250,000 for 30 years at 4 percent interest, your Truth in Lending report would show $429,000 as the full price. The total amount of interest you would pay over the course of the loan is $179,674.
This is frightening for many people. Stress and anxiety have been created by the uncertainty of the housing market. Are we getting ripped off? This is an important question to ask when making a purchase, as it can make all the difference in getting a good deal or not. Can we afford this? Is there more we should have done? It never hurts to look around and make sure you are getting the best deal possible, even though I think we made a good decision.
As the years go by, we chip away at that huge number by signing the loan papers, moving into the home, and making payments. We overlook the fact that we are signing away a large portion of our life savings to pay this loan.
Pay More Than The Minimum
Despite getting an expensive 30-year loan, you can still do a lot to save money.
You can see how much you would pay based on the minimum requirements of the loan in your Truth in Lending report. If you were to make additional payments or pay off the loan early, your Truth in Lending report will give you a breakdown of how much your loan would cost.
You don’t have to keep your payments in this schedule. If you can pay more frequently, the total amount of interest paid will be reduced. If you exceed these minimum requirements, you can save a lot of money and still have the flexibility and freedom of a 30-year loan.
Make 1 Extra Payment A Year
13 payments a year can save money. You can reduce the amount of interest you pay over the life of the loan if you make one extra payment each year.
Let’s continue with our example of a 30-year, $250,000 mortgage at 4 percent:
You could save $120,000 over the life of your loan if you paid an extra $1,200 per year. This could be a good way to pay off your loan early.
How could this be possible? It seemed like a miracle, but the world had changed in an instant. Your loan’s interest charges are generated by the size of your principal, and the extra payment goes directly onto it. This can help you save money on interest charges. Less interest is achieved by achieving a smaller principal. Over the life of the loan, this can help you save money.
Time is an important factor in calculating interest. The effects of time on financial investments can be maximized with compounding interest. You are giving the bank less and less time to charge you interest if you make an extra payment every year. You can save money by paying less interest in the long run. If you don’t have an early payment penalty, less time means less interest. Before deciding to pay off a loan early, it is important to consider all potential consequences.
Spread Out An Extra Payment
Adding $100 a month to your house payment will make it easier to come up with an extra $1,200 a year.
The method seems easier to use for more people. It is possible to take control of your finances and feel more secure in the future. If you apply the extra $100 directly to the principal of your loan, you will get the best results. You will be able to save money on interest payments by paying off your loan faster.
You should be able to specify how your payment is allocated when you pay your bill online. You should double check that your payment is allocated correctly. If you simply add $100 to your payment, your lender may just lower next month’s payment by $100, diminishing the effects of your extra payment. This could be a great way to save money in the long run.
In the past, borrowers would send an additional check each month to make sure the extra money went to the loan’s principal rather than being applied to a scheduled payment. It is possible for borrowers to pay off their loan faster and save money on interest.
The flexibility and freedom of a 30-year loan can be maintained with the extra payment method. You can save money on interest payments if you pay off your loan sooner. It’s a win-win.
Can I Refinance My 30-Year Mortgage to a 15-Year?
Are you looking for a way to reduce the interest on your loan? Refinancing your loan with a shorter term and lower interest rate is one option. You may like the idea of refinancing the entire mortgage as a 15-year (10-year or even 5-year) loan.
If you hit the reset button on your home loan, you would have to pay closing costs again. This could be a good way to save money.
People who make more money now than they did when they bought the house like this idea. They can upgrade their home without having to move.
Combining a refinance with a cash-out equity option to pay for home improvements can be an efficient solution. In addition, the extra cash gained through a cash-out refinance can be used for other projects or investments such as college tuition, debt consolidation, or even starting a business.
Should You Refinance?
The problem is that a mortgage is structured so that you will pay most of the interest upfront.
The first payment on a 30-year mortgage can knock pennies off your balance. When budgeting for your mortgage payment, be aware of the costs of taxes and insurance. The rest of the money is put into a pile of interest. It’s amazing how fast that pile grows.
Your principal is affected by each subsequent payment. You are paying more on your interest during the first half of the loan. Over time, the amount of interest you pay will add up.
If you pay off your 30-year loan after 10 years, you have already paid a huge amount of interest to the bank. Refinancing to a shorter term loan, such as a 15-year mortgage, will allow you to reduce your monthly payments.
Extra payments to your principal and seeing the loan’s balance diminish rapidly are ways to benefit from your hard work. Reducing the amount of interest you pay can help you become debt free sooner.
It is up to the homeowner. You should make the best decision for your home and lifestyle. If you want to get a better rate on your loan, try to do it early in the life of your loan. You can keep more of your money in your pocket.
15-year vs. 30-year Mortgage: Which Is Right for You?
A 15-year loan costs less over time. Taking out a loan with a shorter repayment period is often a better option. Right now, a 30-year loan costs less than a month. Over the life of the loan, you’ll pay more in interest.
Which one is the best? It all depends on what you are looking for in a product, so make sure to do your research and find the one that best suits your needs.
You already know that the best loan is the one that best fits your financial life.
Is it possible to afford the higher payments of a 15-year loan without sacrificing other areas of your family’s financial life? It is important to calculate the total cost of the loan before you make a decision. It is a no-brainer to get that cheaper loan and save a lot of money. It is always a good idea to shop around and compare different loan options before making a decision.
If you are doing well, consider a 10-year or 5-year mortgage to save more than you would with a 15-year loan. Refinancing your current mortgage for a lower rate and term is an even more cost-effective option.
If you can’t afford the higher payment of a 15-year loan, you have a harder decision. The pros and cons of each loan type should be considered.
The loan should be considered in the context of your larger financial life. Ensuring that you can make the loan payments without compromising your other financial goals is important. Here are some guiding questions:
- How much stability and freedom would you have to sacrifice in order to make a 15-year loan’s higher payments?
A 30-year loan may be the best option for sacrificing retirement and having an emergency fund. The longer the loan term, the lower the monthly payments will be. - What would happen if you or your spouse lost your job or got sick and couldn’t work?
The lower payments of a 30-year loan may be a source of relief if they allow you to stay in the home during an emergency. - How long do you plan to stay in the home?
If you own more of the house sooner, you will probably do better with a 15-year loan, because you will have more freedom to sell within a couple of years. A shorter loan term could lead to a higher sale price when the time comes.
I value freedom and flexibility over the best answer to most financial questions, and this value would guide my decision-making. I think a combination of values, knowledge, and intuition is the best way to make successful financial decisions.
Only you can calculate the impact of your financial life on your freedom. Think about how you can use your money to create more freedom for yourself.
