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Beejus1999's avatar

Professional opinion on using a 15 year mortgage versus a 30 year mortgage to buy a home?

Asked by Beejus1999 (10points) August 13th, 2019

What are the advantages and disadvantages of using a 15 year mortgage versus using a 30 year mortgage? I’d like education on any differences in fees and expenses associated with each mortgage length. And of course any other considerations there are.

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6 Answers

seawulf575's avatar

Going with the shorter loan, the 15 year loan does a few things for you. You pay off more of the principle with each payment. This means you build up equity in your home more quickly. Over the life of the loan, the 15 year loan typically will save you tens of thousands of dollars. The downside is that the monthly payment is typically larger which means if you suddenly find yourself on hard times, you will be saddled with a larger mortgage payment.
You could get the best of both worlds, but it takes some discipline. Go with a 30 year loan, but make an extra payment each month. For example, on the 1st of the month, you make the normal mortgage payment. On the 15th you make a payment equal to the principle you make on the second payment. Make sure you apply this to the principle on the loan. On the 1st of the next month, you make the normal payment and then on the 15th make the principle payment of the 4th payment. Your 30 year loan will have the effect of a 15 year loan but you would still have the safety valve of a smaller required payment should you need to exercise that option. If you don’t want to figure out the principle payments, just set a value….$100, $200, whatever…and make that amount applied strictly to principle on the loan. Most home loans don’t have a penalty for early payment so you could pay it off way before the 30 year point and not have a downside.

elbanditoroso's avatar

I agree with @seawulf575 – I have a 30 year loan – I am on year 11 or 12.

For the sake of argument, let’s say that my mortgage payment is billed at $1200/month, due on the first.

I generally pay $200–300 each month towards principal. Exact amount depends on various factors.

About a year ago I ran a calculation, based on that practice – adding $250 average/month – I will pay off the house in 21 years, not 30.

Caravanfan's avatar

Agree with @seawulf575. 15 year loan has lower interest rates but higher monthly payments. Just depends on your budget. Keep in mind with the new tax law you can’t deduct more than $10,000.

JLeslie's avatar

As said above, 15 year loan has a lower interest rate and you pay much less money over the life of the loan. I’m very in favor of 15 year loans if you can afford it.

As far as paying extra each month to reduce the premium of a loan, keep in mind it’s not going to lower your monthly payment amount, it just shortens the loan time frame. It’s not like you can pay $300 extra one month, and then if 6 months later you’re tight on money you can pay $300 less You can’t pay less. I’ve chosen to not put extra towards the premium, and to just save save save, and pay off the loan early instead when I have enough money. While I have the money I can earn interest in it.

You have to run all the numbers to know what’s best for you.

When you compare loans be sure to look at the total amount you will have paid over time. Like a $100,000 loan at 4% at 30 years is $172,000. $100,000 at 3.5% for 15 years is $129,000.

Beejus1999's avatar

Thanks for the help everyone. I tested out your idea using a 30 year mortgage but paying the extra principal payments and you’re right that it works out exactly like a 15 year mortgage. I never knew that was possible. I used this home loan calculator that gave me the option to make extra payments. I guess the only drawback is that the interest rate will be a little higher on the 30 year mortgage. But I think the extra flexibility that provides is worth the higher interest rate. I’ll probably also go the FHA loan route so that I keep my down payment low and then over time as I feel comfortable, I can make extra payments. Unless there is a catch to the FHA loan that I’m not aware of. Is that the mortgage where you have to pay PMI? And if so, is that typically expensive enough to wish you weren’t paying it?

Thanks so much for the explanation and help!

JLeslie's avatar

All mortgages require PMI if you put down less that 20%.

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