Buying a new home is a huge achievement. Congratulations! The first step in purchasing a new home is obtaining a letter of pre-approval. Most sellers will only seriously consider your offer if you have this letter in your possession. A letter of pre-approval makes your offer more competitive.

However, to get this letter you will need to decide on the mortgage. Will you select a fifteen or a thirty-year mortgage. Each type has a few key benefits. It is important to understand the benefits of these two types of mortgages and their differences. This will allow you to determine when to pick a fifteen versus a thirty-year mortgage.

15 Year Mortgage

A fifteen-year mortgage is a great option for those with wiggle room in their budget. As the name would suggest, a fifteen-year mortgage will be paid off in half the time of a thirty-year mortgage. This is beneficial for older home buyers and those who want to build equity quickly. Take a look at the benefits of a fifteen-year mortgage.

Benefits

  • You will save on interest.
  • The payoff time is quicker.
  • You will build equity more quickly.

When to Pick A Fifteen-Year Mortgage

  • When your home costs much less than your budget allows.
  • If you are an older home buyer with fewer financial obligations.
  • Anytime you can reasonably afford the monthly payment.

30 Year Mortgage

The idea of paying your mortgage off faster is enticing. However, a fifteen-year mortgage is not always a viable option. A thirty-year mortgage will permit smaller monthly payments, but you will pay way more in interest. Thirty-year mortgages are beneficial for people with many financial obligations. They are also the most common mortgage selected by first time home buyers.

Benefits

  • The monthly payments are much more affordable.
  • The low monthly payments permit wiggle room in the budget.
  • The loan will appear on your credit for the duration. This can improve your credit by increasing your credit age.

When to Pick A Thirty Year Mortgage

  • When you cannot accurately predict your future finances.
  • When the payment on a fifteen-year mortgage is too high.
  • When you require flexibility in your budget.

The Differences

There are a few key differences between a fifteen and a thirty-year loan. It is vital to understand these differences in order to determine which loan is best for you and your family. The monthly payment will need to fit your budget now and for the entire duration of the loan.

Amount of Interest

If you qualify for both a fifteen and a thirty-year loan, you may notice that the interest rates are similar. Don’t let the number fool you. You will pay far more interest on a thirty-year mortgage than you will on a fifteen-year mortgage. In some cases, this difference may be up to fifty percent more.

The amount of interest you pay will span out over the course of the loan. Because there is less interest paid on a fifteen-year loan and the term is shorter, a fifteen-year loan will build equity much more quickly than a thirty-year loan.

The Monthly Payment

The monthly payment is far less for a thirty-year mortgage than a fifteen-year mortgage. For most home buyers the lower monthly payment is what attracts them to the thirty-year mortgage. A lower monthly payment is beneficial for homebuyers who fear unexpected expenses or have children to provide for.

The lower monthly payment offered by the thirty-year mortgage also allows for flexibility in your budget. It can be hard to sign a fifteen-year mortgage when you cannot accurately predict your financial health in the future. In most cases, the difference in monthly payments is hundreds of dollars.

The Length of the Loan

The most obvious difference between these loans is the length of the repayment term. The thirty-year loan takes double the amount of time to pay off. This results in paying more interest, but it also allows lower monthly payments. 

Because the terms are so different, a fifteen-year mortgage is best for older home buyers. This is especially true if you desire to have the home paid off before retirement.

15 vs 30 Year Mortgages: Which Is Best?

Whether a fifteen or thirty-year mortgage is better depends entirely on your situation. Many people believe that finances are the only determining factor in this decision. This is not the case. Consider your future. Do you plan on having children? How much will you need to budget for child-related expenses? This amount is different for every family.

Another thing to consider is how much you’d like to save every month. Do you want to save for vacations? How much would you like to put towards retirement? Many people are not able to answer these questions specifically. If you are one of these people, you may opt for a thirty-year mortgage to ensure financial flexibility.

In some cases, the house you are looking for may be well below your budget. In these scenarios, a fifteen-year mortgage is likely the best option. You should have the finances to pay the mortgage and still have room in your budget. A fifteen-year mortgage is also best if you have very little financial obligations. This is often the case with single people and older adults.

As you can see, the decision is very personal. Take the time to consult with a financial advisor to ensure that you are making the best decision for yourself and your family.

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