15 vs 30

Should you get a 15 or 30-year mortgage?

If you have asked yourself “Should I buy a home or keep renting” and properly considered the pros and cons of buying vs renting a home, you may choose to buy a house. After checking your credit, thoroughly considering your budget, and getting prequalified for a loan from the bank, you may have found a house you like. Now you need to decide what type of mortgage term is best for you.


Point 1: Real estate investors may want a 30-year mortgage

If you are a real estate investor who is buying a home for the sole purpose of using it as an investment property that you rent to someone else, then it is generally best to opt for a 30-year mortgage. As a real estate investor, you are using your tenant’s rent payment to pay off your monthly mortgage, so you are less concerned with paying off your mortgage as quickly as possible. Plus, opting for a 30-year mortgage lowers your monthly mortgage payments to the bank. This means you get to keep a larger portion of the rent your tenant pays you. Opting for a 30-year mortgage instead of 15-year mortgage as a real estate investor creates more cash flow each month, which increases your passive income.


Point 2: Deciding on 15 or 30-year mortgage varies based on your circumstances

The decision to get a 15 or 30 year mortgage is not as black and white for residential homeowners. If you are buying a home to live in yourself, the optimal loan term depends on factors unique to your own circumstances. For starters, the bank only offers 15 year mortgages to people who meet certain criteria. Only people with a certain credit score and debt-to-income ratio are eligible. Secondly, a 15-year mortgage has the advantage of offering a lower interest rate than a 30-year mortgage. This lower interest rate will save you lots of money over time. I’ll expand on this with the next point.


Point 3: A 15-year mortgage saves you money in interest payments

The main perk of having a shorter loan term, like a 15-year mortgage, is that your interest rate is lower AND the time on which you pay interest is shorter. Both of these factors save you lots of money in interest over the life of the loan. For example, let’s say you and your spouse want to buy a home that costs $250,000. Let’s also assume that you saved up 10% for a down payment (or that your parents gave you a very generous wedding gift for $25,000 that you then used on your home). If you chose a fixed 30-year mortgage with a 4.5% interest rate, by the end of the 30 years you would have paid back the $225,000 you borrowed PLUS an additional $185,000 in interest fees. You nearly paid double for the house!

However, if you had instead taken out a fixed 15-year mortgage (which usually comes with a lower interest rate, so let’s say 3.75% interest), then you would have paid back that $225,000 in 15 years in addition to paying only $69,000 in interest. By opting for the 15-year mortgage you paid off the home in half the time and saved $116,000 in interest payments! I don’t know about you, but I can think of a bunch of things I’d rather do with $116,000 than pay it to a bank in added fees. You are going to pay a lot of money in interest regardless, but the difference in interest you would pay on a 30-year mortgage compared to a 15-year mortgage is HUGE.


Point 4: A 30-year mortgage has lower monthly payments

In case I’ve just convinced you to opt for a 15-year mortgage, let me remind you of one downside. In order to pay the loan in 15 years, you have to pay the bank a much higher monthly payment. Using the example from above of a 250,000 home with a $25,000 down payment and a $225,000 loan, the payments on a 15-year mortgage at 3.75% interest are $1,919 per month.  The monthly payments on a 30-year mortgage at 4.5% interest is $1,423 per month, which means you pay almost $500 less each month. For many people, that difference of $500 is huge. They may want to take that $500 and put it into their 401K retirement account. Or, they may want use that $500 to pay back student loans, credit card bills, or other high credit card interest debt.


Point 5: There are other ways to save money in interest if you opt for a 30 year mortgage

Keep in mind that if you decide to get a longer mortgage term initially, all is not lost. The interest you pay on your mortgage over time will be higher, but there are ways to combat this. You can: 1) pay more than the required payment each month on your mortgage (if there is no prepayment penalty), 2) send in extra monthly payments each year, or 3) refinance your mortgage to a shorter term after a few years to lower the interest rate.


To Summarize, if you’re a real estate investor, you may want to opt for a 30-year mortgage. This will lower your monthly payments and increase your monthly cash flow. If you’re buying the home to live in yourself, it depends.

·      You may want to opt for a 15-year mortgage if you are established in your career with a steady salary and can afford the higher monthly payment.

·      You may want to opt for a 30-year mortgage if you would rather have lower monthly payments (at the expense of a higher interest rate) in order to pay off high-interest rate debt (credit cards and student loans) or fully maximize the employer match of 401K retirement accounts (if you have one).

If you decide to opt for a longer mortgage term now, you may be able to pay off the loan faster in other ways (i.e. by sending in extra payments, paying more than the minimum each month, or refinancing later).