How to choose between a 15-year and 30-year mortgage

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One of the most important aspects of taking out a mortgage to buy a home is making sure the terms of the loan best suit your financial needs. It is not only about the lowest possible interest rate, but also about choosing the right mortgage term.

The term of the mortgage indicates how much time you have to pay off your loan in full. The two most common home loan maturities, where borrowers typically have to choose between 15 and 30 year mortgages, although some lenders will offer you terms as short as eight or 10 years.

These 15-year and 30-year mortgages each have their own pros and cons, so it’s important to make the choice that best suits your financial goals.

Below, Select takes a closer look at the trade-offs between 15-year and 30-year home loan terms and what to consider when deciding between them.

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Does the monthly payment fit into your budget?

In general, the longer the term of your loan (or the term of the loan), the lower your monthly payments. That’s because borrowers pay off their home loans in fixed, equal monthly payments over the life of the loan—someone with a longer time horizon will end up counting on that lower payments compared to someone with a shorter time horizon for the same loan amount.

rocket mortgageone of the largest home loan lenders in the US, uses an example a $240,000 home loan with an interest rate of 4% to illustrate this point. If the borrower chooses a 30-year term, they make a monthly payment of $1,145.80 including principal and interest (insurance and other charges are not included in this case). However, if they choose a 15-year loan term, the monthly payment is $1,775.25 — that’s a difference of more than $629.45 per month.

If you assume you don’t have enough headroom in your monthly budget to take on a larger mortgage payment, it might make more sense to opt for a 30-year term so you can have smaller monthly payments over a longer period of time.

Is your goal to save on interest?

A major disadvantage of a 30-year mortgage is that you have to pay more interest over the life of the loan. Not only will you be charged interest for a longer period of time, lenders will usually offer slightly higher interest rates for this option – the quicker they can be paid off in full the better, given the risk that you may default on your payments , will be smaller.

Some borrowers may be reluctant to the idea of ​​paying more interest over time and may prefer to save on those fees by paying a slightly higher amount each month. If saving on interest is most important to you, a 15-year mortgage might be a better fit for you.

If you want to get a lower interest rate on your mortgage, make sure that too have good credit when applying and consider one of the top mortgage lenders as rated by Select such as rocket mortgage and SoFi.

rocket mortgage

  • Annual Percentage Rate (APR)

    Apply online for personalized rates

  • types of loans

    Conventional Loans, FHA Loans, VA Loans, and Jumbo Loans

  • conditions

    8 – 29 years, including terms of 15 and 30 years

  • credit required

    Typically requires a credit score of 620, but will consider applicants with a credit score of 580 as long as other eligibility criteria are met

  • minimum deposit

    3.5% if proceeding with an FHA loan

advantages

  • May use the loan to purchase or refinance a single family home, second home, or investment property or condo
  • Can be pre-qualified in minutes
  • Rocket Mortgage App for easy access to your account

Disadvantages

  • Performs a tough request to provide a personalized interest rate, which means your credit score may suffer a little damage
  • Does not offer USDA loans, HELOCs, home loans or RV mortgages
  • Does not manage jumbo loan accounts after closing

SoFi

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; Fixed rate and adjustable rate mortgages included

  • types of loans

    Conventional loans, jumbo loans, HELOCs

  • conditions

  • credit required

  • minimum deposit

advantages

  • Fast pre-qualification
  • Provides access to Mortgage Loan Officers for guidance
  • $500 discount for existing SoFi members
  • 0.25% price reduction when locking in a 30-year installment on a traditional loan
  • Offers up to $9,500 cashback when you buy a home through SoFi Real Estate Center

Disadvantages

  • Does not offer FHA, VA or USDA loans
  • Mortgage loans are not available in Hawaii

Do you plan to tap into your home equity sooner rather than later?

Home value is a measure of how much of the property you actually own. Think of it this way: if you adopt a Mortgage, you make a down payment but pay the lender back the loan they gave you to buy the house.

For example, if you only put down a 10% down payment on a $400,000 property, the lender essentially owns more of it than you since you only paid 10% of the home’s value. As you continue to make your mortgage payments over the years, you will eventually own more of the property than the lender, and so you will build equity in your home.

Having a significant amount of equity in your home can come in handy when you decide to take out a home equity line of credit or HELOC for major renovations or other big expenses. You can also use your home equity through a HELOC as a down payment on an investment property, so building equity earlier can also help meet certain goals faster.

The higher your monthly mortgage payments, the faster you can build your equity — another reason why a 15-year mortgage may be more attractive to some borrowers.

How soon do you want to be debt free?

A major benefit of the 15-year repayment term is that you can pay off your house 15 years earlier than if you opted for the 30-year mortgage.

Being mortgage free means you will have more room in your budget for other things – some homeowners may want to pay off their house as soon as possible so they can buy a second property and instead focus on paying off the mortgage on it.

Other people may just be emotionally uncomfortable with debt and prefer to get rid of it as soon as possible. Keep in mind that while you can take a 15-year term to be mortgage-free sooner, with a slightly lower interest rate and more money overall you can save on interest, you’ll have to make larger monthly payments in return.

More considerations

If you want to build equity faster and save on interest but can’t commit to making higher monthly payments on a 15-year mortgage, you can try making additional mortgage payments to pay off the loan faster. This works best as long as your mortgage lender doesn’t charge any fees Prepayment penalties for early repayment of the loan.

If you’re still a few years away from starting your home buying journey, it can still be helpful to contact a few mortgage companies so you can learn more about the financial steps you need to take to put yourself in an ideal position to buy your home to be .

For example, if you really want to take out a 15-year mortgage, but your current income doesn’t allow you to make higher payments, a mortgage lender might suggest that you save more money and get a better-paying job so you can afford it .

If you’re still not sure where to start when it comes to finding a lender to work with, Select has rounded up a few that will meet a variety of needs. Allied Bankfor example, does not charge lender fees, which can help borrowers save some money upfront during the home buying process.

Chase Bankamong other popular lenders, also offer a jumbo loan option for those who may need to borrow more than $647,000 to buy their home.

Allied Bank

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; Fixed rate and adjustable rate mortgages included

  • types of loans

    Conventional Loans, HomeReady Loans, and Jumbo Loans

  • conditions

  • credit required

  • minimum deposit

    3% if proceeding with a HomeReady Loan

advantages

  • The Ally HomeReady loan allows for a slightly lower 3% down payment
  • Pre-approval in just three minutes
  • Application submission in just 15 minutes
  • Online support available
  • Existing Ally customers can receive a discount applied to the closing cost
  • Does not charge lender fees

Disadvantages

  • Does not offer FHA loans, USDA loans, VA loans, or HELOCs
  • Mortgage loans are not available in Hawaii, Nevada, New Hampshire, or New York

Chase Bank

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; Fixed rate and adjustable rate mortgages included

  • types of loans

    Conventional Loans, FHA Loans, VA Loans, DreaMaker℠ Loans, and Jumbo Loans

  • conditions

  • credit required

  • minimum deposit

    3% if you proceed with a DreaMaker℠ loan

advantages

  • The Chase DreaMaker℠ loan allows for a slightly lower 3% down payment
  • Discounts for existing customers
  • Online support available
  • A range of resources for first-time home buyers including mortgage calculators, affordability calculators, educational courses and home guides

Disadvantages

  • Does not offer USDA loans or HELOCs
  • Existing customer discounts apply to those who have large balances in their deposit and investment accounts with Chase

Editorial note: Any opinion, analysis, review, or recommendation expressed in this article is solely that of Select’s editors and has not been reviewed, approved, or otherwise endorsed by any third party.

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