15 vs. 30 Year Mortgage: Which is Right for You?

Deciding between a 15 and 30 year mortgage is a big decision for most homebuyers. The prospect of owning your home outright in half the time makes the 15 year mortgage look good, while the lower monthly payments draw a lot of homebuyers towards the 30 year mortgage.

Advantages of a 15 Year Mortgage

Aside from the major benefit of paying off your mortgage in 15 years as opposed to 30, you will usually end up with a lower interest rate compared to a traditional 30 year mortgage. Depending on a number of factors, you can expect to pay about .6-1 full percentage point less than you would with a 30 year fixed mortgage.

Though you will end up with a higher monthly payment, the rate at which you build equity is much faster than with other loan terms. If you needed to sell or refinance, you will likely get more out of your home due to the extra equity.

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Advantages of a 30 Year Mortgage

Having a lower monthly payment is what many borrowers are looking for in a mortgage. Generally, if you have a smaller downpayment, your monthly payments will be substantially smaller than if you took out a 15 year mortgage.

For example, on a $100,000 mortgage at 3.5%, a 30 year term would produce a payment of about $449 before taxes and PMI, while a 15 year mortgage would result in a $715 monthly payment of just principal and interest. Some homebuyers may be squeeze with a $715 payment but have a very substantial cushion at $449.

Another overlooked benefit is the ability to claim mortgage interest against your income on your taxes, if you itemize deductions. This is especially prevalent at the beginning of the loan, when the vast majority of your monthly payment is going towards interest.

Which Mortgage Term is Right for You?

It will almost always come down to your income and current budget when deciding which term would work best for you. Some people may not have a choice and be unable to qualify for a 15 year mortgage because the payments are too high, which is why you see far more 30 year mortgages being issued from lenders as opposed to 15 year mortgages.

Most experts will tell you to go with the 15 year mortgage, if you can afford it. In a way, it helps force you to save money, while at the same time paying a lower interest rate over the long term. A good rule of thumb to consider is that your mortgage payment should be between 15-40% of your take-home income. Any less and you may want to consider trying to buy outright, if your other bills are not substantial. More than 40% of your take-home income going to a mortgage may be a sign that you either need to consider a cheaper housing option, longer mortgage term, or put down more upfront.

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