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Whether you should get a 15- or 30-year mortgage depends on several few factors, including your income, how long you plan to own the home and the interest rates available. Every homebuyer's situation is unique, but we'll break down how to decide on the right mortgage term length for you. That way, you'll be better equipped to find the right loan at the right price for your new home.
How Does Your Mortgage Term Impact Cost?
When you pay back a mortgage, your monthly loan payment is split between paying down the principal balance (the amount you borrowed to cover the home purchase) and paying interest. As you pay off your loan, your interest payments are recalculated based on the remaining balance, and over time, less of your monthly payment will go toward interest and more toward principal. This concept is called amortization. Depending on your mortgage term, the amount of each monthly payment that goes toward either the interest or the principal balance can be altered.
The length of your mortgage term can affect costs in several ways, but one of the biggest factors is how it can influence your interest rates. The current national average rates stand at around 2.64% for a 15-year mortgage and 3.34% for the 30-year option. The rates for your specific mortgage will vary based on factors like your home's price, your credit score and income.
As a result, a 15-year mortgage costs less in the long term, but a 30-year term requires lower monthly payments. The 15-year mortgage's principal will be paid down faster with the shorter timeline and higher monthly payments.
Suppose you're approved for a $500,000 mortgage with a 10% down payment. For simplicity's sake, let's say the interest rate is 3.5% for the 15-year loan and 4% for the 30-year term (not including closing costs and other fees since these are often paid upfront and not included in the loan amount).
In this example:
- Over 15 years, you'd make a monthly mortgage payment of $3,525, and you would pay about $634,000 by the end of your loan term.
- Over 30 years, your monthly payment would be $2,456, and you would pay about $884,000 over the life of the loan.
Check out our mortgage calculator to crunch the numbers for your own situation:
†The information provided is for educational purposes only and should not be construed as financial advice. Experian cannot guarantee the accuracy of the results provided. Your lender may charge other fees which have not been factored in this calculation. These results, based on the information provided by you, represent an estimate and you should consult your own financial advisor regarding your particular needs.
When Does a 15-Year Mortgage Make More Sense?
As you can see in the above example, the No. 1 benefit of a 15-year mortgage is paying considerably less over the life of the loan and doing so in a significantly shorter timeframe. Going by our previous example, the 15-year loan would save you $250,000 compared with the 30-year loan.
But the high monthly cost of a 15-year mortgage is a drawback for many and an impossibility for others. Even if you could afford it now, the higher monthly payment may make things tougher if life introduces new costs or unexpected changes to your budget (think having children, changing or losing a job, or sudden emergency expenses).
You also will need a higher credit score for the 15-year loan, but you stand to secure some serious benefits with the condensed timeline in addition to the lower total cost. For instance, you may be able to dodge some fees with a shorter-term loan, and you'll build equity in your home more quickly. A shorter mortgage may also be preferable if you're going to be on a fixed retirement income.
When Does a 30-Year Mortgage Make More Sense?
Despite the higher interest rate on a 30-year mortgage, the longer loan term will mean a much lower monthly mortgage bill, which can free up a significant amount of your money in your budget. That means more you can put into savings, investments and future family expansions. The simple math of having more cash on hand every month can be appealing to many borrowers, despite the increased overall cost of the loan.
One of the best opportunities of the 30-year option is the financial flexibility it can afford. While you won't be locked into a higher monthly payment, it's still possible for you to treat your 30-year mortgage like a 15-year mortgage. If you can afford it and choose to do so, you can make higher monthly payments on your 30-year mortgage and expedite the repayment timeline. Since you're making a higher monthly payment by choice, you can always go back to making the required monthly payment if your financial situation changes.
Opting for the 30-year mortgage can also mean you're able to afford to make investments. You could invest the difference you save on monthly payments and potentially come out ahead over the long term. The return on your investments would have to be higher than your mortgage rate for you to at least break even, however, which could be possible depending on your investment strategy and market factors.
How to Decide How Much House You Can Afford
Of course, your loan's length isn't the only consideration you should make when determining what type of home you can afford. These factors will determine your interest rates, mortgage eligibility and total homeownership costs:
- Your creditworthiness is an important factor in your interest rates and in meeting your mortgage lender's requirements. You can review both your credit score and report for free with Experian.
- Your debt-to-income ratio (DTI) measures the portion of your income that goes toward paying your debts, and it's an important factor lenders consider when deciding whether you can afford a monthly mortgage payment. You can be denied a loan if your debt payment would comprise too much of your budget.
- Your down payment will help set your loan's size and interest rate.
- Other costs, including property taxes, insurance, building association dues and any repairs or renovations, can all add up in your budget.
The Bottom Line
Choosing the longer mortgage term could mean you can afford more house, but a shorter-term mortgage will save you significantly more over the loan term if you can swing those monthly payments—so calculate carefully. A mortgage is a big step for anyone, and you can make it a leap in the best possible direction when you choose wisely.
Before you start the mortgage application process, make sure you understand where your credit stands. You can get a free copy of your credit report and score through Experian, and view the risk factors that can be affecting your scores.