If you are applying for a new mortgage, you may already have decided on a fixed rate mortgage. But you haven’t yet decided on whether to take a 15-year or 30-year loan. Here are some things to consider when making that choice.
In structure, both are similar, the big difference being the loan term. The shorter the term of the loan, the higher the monthly payment.
But because the monthly payment is fixed, the part paying off interest and the one paying off principal change over the life of the loan. As the balance of the loan gets smaller, that share of the interest payment becomes less with more money going toward principal, reducing the balance even quicker. This is one reason why a 15-year loan increases in equity faster than a 30-year loan.
Consider Your Own Finances and Goals
Both loan products have their advantages and disadvantages depending on your financial profile and your goals. Your first step should be to consider your own financial situation. You will want a good understanding of how much you can afford to pay for a mortgage payment each month considering your other bills.
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What are your total bills each month? How much do you have in the way of savings should you need them? And what is your current credit score? Before taking on a large responsibility like a mortgage, it’s important to get a clear picture of your budget.
30-Year Mortgage Factors
30-year mortgages are the most popular mortgages today. A 30-year mortgage will afford you lower payments because the term of the loan is longer but of course, the pay-off time is longer as well. Consequently, a 30-year mortgage will typically have a higher interest rate than a 15-year loan because it is considered riskier. It’s also important to note that over the full life of the loan, a 30-year loan will end up costing more than double its 15-year counterpart.
Because of the lower payments of a 30-year loan, a borrower may have extra money to devote to other expenses or personal savings. If a borrower is looking to pay off high-interest debt, credit cards or student loans, having a 30-year mortgage allows for that extra money. It can also allow for a financial cushion or funds for making home improvements or even investing in other vehicles.
30-year mortgages may be particularly good for a borrower that has less expendable income each month and is looking to be in the home for the long-term, such as a family that is just starting out.
15-Year Mortgage Factors
Because a 15-year mortgage is less risky, it will typically carry a smaller interest rate. But the monthly payment will still be larger because the pay-off period is shorter. One of the great advantages of a 15-year loan is the ability to build up equity in the home faster. A 15-year mortgage can benefit a borrower who doesn’t plan on being in the home long-term or one who is looking at retiring soon.
Getting expert help is one way to weigh the factors between mortgage products. At Bridgeport Funding we offer many different types of mortgage products in Walnut Creek and throughout California. Call us today at (925) 478-8630 to speak with one of our mortgage professionals.