New American Funding Blog

Choosing Between a 15-Year and a 30-Year Fixed-Rate Mortgage

By Courtney Lynch   |  May 24, 2016

While a 15-year fixed-rate mortgage lets you build equity faster, it is not always the best decision. A fixed-rate mortgage is an ideal choice for homebuyers who seek the security of unchanging monthly payments and protection from inflation-based adjustments to their loans. Once you have decided you prefer a fixed-rate mortgage over an adjustable-rate loan, you then have to determine the number of years you want to spend paying it back.

The two most common fixed-rate loan durations are 15 and 30 years. Of course, a 15-year mortgage sounds more ideal than a 30-year mortgage, as you will build equity faster and spend a smaller portion of your life indebted to the bank. Nevertheless, there are substantial pros and cons to each choice, and the best option for you is dependent on both your current financial situation and your future financial goals. 

Advantages of a 15-Year Fixed-Rate Mortgage 

When you pay back your mortgage loan in half the time it would take to pay back a 30-year loan, there are some considerable advantages: 

  1. 15-year loans prioritize paying down the principal over paying interest, which means you will pay less in interest over the life of the loan than you would on a 30-year mortgage. Interest builds over time, so the longer a loan lasts, the more interest a borrower will end up paying. 
  2. Interest rates are typically lower for 15-year loans than they are for 30-year loans. 
  3. You build equity faster, and you will be able to eradicate the burden of monthly mortgage payments in a shorter amount of time. 

"The best fixed-rate mortgage term depends on your current financial situation and future financial goals."

With the combination of lower interest rates and a focus on paying down the principal, homeowners with a 15-year fixed-rate mortgage have the potential to save hundreds of thousands of dollars over the life of their loans.1

Disadvantages of a 15-Year Fixed-Rate Mortgage 

The advantages of a 15-year fixed-rate mortgage certainly make it worth considering, but there are also some drawbacks that might not make it the smartest choice for everyone: 

  1. The monthly mortgage payment is substantially higher, which makes sense considering you are spending half the time paying back the same amount of money. 
  2. It is more difficult to save money. You are sending a hefty check off to the bank each month, which makes it harder to set aside money for other things you might be saving for, like retirement, your child's education or a vacation home. 
  3. It requires immense job stability. Making a commitment to such high monthly payments means you should be as sure as possible that nothing could happen to your career that would cause your income to lower or disappear altogether.2

If you are considering a 15-year loan, weigh your average monthly expenses and ask yourself whether you can afford to contribute such a high monthly payment to your mortgage. A New American Funding Loan Officer would be happy to sit down with you and calculate your potential monthly payment for a 15-year fixed-rate loan and help you determine whether you would be able to shoulder the costs. 

Advantages of a 30-Year Fixed-Rate Mortgage 

A 30-year fixed-rate mortgage is chosen by homebuyers for the following reasons:

  1. The monthly payments are lower, as the borrower has an extra 15 years to pay back the loan. 
  2. It makes it easier to save up for other expenses. 
  3. There are greater tax advantages because the mortgage interest deduction will apply to you for a longer period of time.

Just because you choose a 30-year mortgage doesn't mean you have to spend three decades paying it off, though. Selecting this loan means you have the leeway to make a single, lower monthly payment, but you can also send the bank more money than you owe each month to pay down your principal faster and build less interest. This option gives you the security of knowing you won't have to make extremely high monthly payments, but it also gives you the flexibility to do so if you want to. If you contribute more than your amount owed each month, you'll pay off your loan in fewer than thirty years without the added pressure.

Disadvantages of a 30-Year Fixed-Rate Mortgage 

There are three major disadvantages to a 30-year fixed-rate mortgage: 

  1. Interest rates are generally higher than they are on a 15-year mortgage. 
  2. It takes longer to remove the burden of monthly mortgage payments from your budget. 
  3. More interest builds up over time, and you could end up paying hundreds of thousands of dollars more over the life of the loan than you would on a 15-year mortgage. 

Despite these shortcomings, a 30-year fixed-rate mortgage is often the best option for homebuyers who need access to more of their cash on a monthly basis. 

Still Not Sure What to Do?

If you are still having trouble deciding which type of fixed-rate mortgage is right for you, New American Funding is here to help. Our Loan Officers are fixed-rate mortgage experts, and they want to help you choose a loan that will bring the most benefits to you and your family. Contact New American Funding today and you'll be one step closer to the home of your dreams. 

In the meantime, you can check out our online fixed-rate mortgage calculator, which takes only seconds to help you determine how much you would pay for different types of fixed-rate loans. 

Sources 
1The Mortgage Reports 
2SmartAsset

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