15-Year Mortgages Have Lower Rates than 30-Year
The first thing to consider is that a 15-year loan will almost always have a lower rate compared to an equivalent 30-year loan.
How much lower? It depends, but it’s not uncommon to see about half of a point of difference. So if your 30-year rate would be 3.5%, your 15-year rate would likely be close to 3%.
How does this affect your payment? Well, it’s difficult to make a direct comparison since the 15-year loan would have higher premiums. After all, you’re paying off the loan in just 15 years instead of 30. But you can think of it like this.
If your mortgage is $400,000 and your interest rate was 3.5%, your monthly payment would be about $1,796.
With the same mortgage but a lower rate of 3%, your monthly payment would be around $1,686. Unfortunately, that’s not the exact comparison we’re looking for since it’s comparing two 30-year mortgages. But it does highlight that the lower interest rate saves money – thousands of dollars over the length of the mortgage.
30-Year Mortgages Free Up Funds for Other Things Compared to 15-Year
Something else to think about is the opportunity cost. If you go down the path of a 15-year mortgage, your monthly payments will be much higher compared to a 30-year. While that does let you pay down the loan faster, the downside is it takes away money you can use for other things.
For example, maybe you’ve been thinking of starting a small business and that money could come in handy. A few hundred dollars a month can go a long way towards helping a small business grow. Maybe you’d be able to use those funds to grow the business by 20% every year. That’s a lot better than the 3% rate on your mortgage!
Or maybe you have fallen behind on saving for retirement. Depending on the financial expert you talk to, they’ll say the stock market averages between 7 – 10% per year. Either way, that’s a lot better than the 3% interest rate you’re paying on the mortgage. Maybe it makes sense to get a 30-year mortgage, take the extra money you get to save each month and invest it into the stock market.
The point is, by going with a 30-year mortgage you have extra money in your pocket to do other things. This is the main reason why most people choose this route instead of a 15-year mortgage.
15-Year vs a 30-Year Mortgage – How Much Do You Hate Debt?
Some people hate the thought of being in debt. If you’re in that camp, maybe it makes sense to get a 15-year mortgage. That helps you pay off the loan ASAP and have that weight off your shoulders.
On the flip side, maybe you’re okay having debt. In that case, consider getting a 30-year mortgage so you have extra money to invest in other things.
Which is right for you? There’s no right answer in the 15-year mortgage vs 30-year debate. But we can help you figure out the best route for your specific situation and needs. Give us a call at (877) 556-2655 and we’ll answer any questions you have.