Deciding upon the right home is hard enough, let alone when you add in trying to decide upon a mortgage too. Selecting between a 15 and 30 year mortgage might just seem like deciding between a higher or lower monthly payment, but it can be much more than that.
When we bought our last home, we put time not just into selecting the property but selecting the mortgage as well. Here are the main factors we considered when choosing between a 15 and 30-year mortgage.
Considering interest rates
There is often about a 1 percent difference between a 30 and a 15-year fixed rate mortgage. For example, when we were deciding on our mortgage back in 2007, a 30-year mortgage rate feel into the 6 to 7 percent range, while a 15-year mortgage was closer to the 5 to 6 percent range. And while such ranges can fluctuate depending upon economic conditions as well as between lending institutions, it’s typical to find lower rates on the shorter term mortgages.
And while a single percentage point difference might not seem like much, consider that the difference between a $200,000, 30-year fixed-rate loan at 5 percent and 6 percent is almost $40,000 over the course of the loan and you can begin to see just what a difference even small adjustments in interest rates can make over time.
Reviewing long-term savings
Then of course there is the difference in long-term savings that hinge upon the length of the loan itself. Take for example, that same $200,000 loan at 5 percent. Over the course of 15 years, it would cost about $75,000 in interest, whereas over a period of 30 years, it would cost almost $172,000 in interest.
So the long-term savings of a shortened loan can play a significant role in making the choice between a 15 and 30-year mortgage.
Developing a payoff plan
When pairing the savings from the lower 15-year interest rate with the reduced interest payment amount due to the shortened timeframe, going with the 15-year loan seemed like the right option to us.
We determined that by making extra payments toward our loan – both through a bi-weekly mortgage payment plan and extra payments on our own when we had extra cash available – we’d be able to have our mortgage paid off after 10 years. This was also the length of time we’d determined we wanted to live in our home before relocating.
While we ended up moving before then, the equity we’d built in our home allowed us to downsize to own without a mortgage, a situation that we might not enjoy had we not taken on the shorter 15-year mortgage to begin with.
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The author is not a licensed financial, mortgage or real estate professional. This article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.