Having a shorter mortgage term means higher monthly payments but paying less interest over the life of the loan. There are pros and cons to consider when deciding between a shorter or longer mortgage term.
What are the benefits of a shorter mortgage term?
There are several potential benefits to choosing a shorter mortgage term:
- You pay less interest over the life of the loan – With a shorter term, you pay off the principal faster and have less time for interest to accrue.
- You build equity quicker – More of your payment goes towards principal each month, building your equity faster.
- Your home is paid off sooner – Having your home paid off by retirement age can provide security and flexibility.
- Your monthly payments may go down sooner – Once your home is paid off, you will no longer have a mortgage payment.
What are the downsides of a shorter mortgage term?
There are also some potential downsides to weigh:
- Higher monthly payments – With the loan paid off faster, your monthly payments will be higher.
- Less flexibility in cash flow – The higher payments leave less room in your monthly budget.
- Harder to qualify – You’ll need to prove you can afford the higher payments.
- Less time to invest extra funds – Money going towards higher mortgage payments can’t be invested elsewhere.
How much interest could you save with a shorter term?
The interest savings from a shorter mortgage term can be substantial. For example:
| Loan Amount | Interest Rate | 30 Year Term | 15 Year Term | Interest Savings |
|---|---|---|---|---|
| $200,000 | 4% | $143,800 | $54,600 | $89,200 |
| $300,000 | 4% | $215,700 | $81,900 | $133,800 |
| $400,000 | 4% | $287,600 | $109,200 | $178,400 |
As you can see, the interest savings from a 15-year mortgage over a 30-year mortgage range from $89,200 to $178,400 on loan amounts from $200,000 to $400,000.
How much will my mortgage payments increase?
Going from a 30-year to 15-year mortgage will increase your monthly payments. For example:
| Loan Amount | Interest Rate | 30 Year Payment | 15 Year Payment | Payment Increase |
|---|---|---|---|---|
| $200,000 | 4% | $955 | $1,432 | $477 |
| $300,000 | 4% | $1,432 | $2,147 | $715 |
| $400,000 | 4% | $1,910 | $2,863 | $953 |
As shown, monthly payments on a 15-year mortgage are around $450 to $950 higher per month compared to a 30-year mortgage.
How can I manage the higher monthly payments?
If you want the benefits of a shorter mortgage term but are concerned about affording the higher payments, here are some tips:
- Shop for the best interest rate – A lower rate will mean a lower payment.
- Make additional principal payments – Making an extra payment periodically can help pay off the mortgage faster.
- Pay biweekly – This results in an extra month’s payment per year, accelerating payoff.
- Refinance later – Consider refinancing to a lower rate when possible.
- Get a roommate – Rental income can help offset your monthly costs.
- Delay other goals – Postpone things like vacations or a new car temporarily.
15 or 30 year mortgage: Which is better?
There is no definitively “better” option. Here are some key factors to consider:
- Your financial situation – Can you afford higher payments? How stable is your income?
- Your goals – Do you value being mortgage free or want flexibility?
- Interest rates – The difference between rates for 15/30 years impacts costs.
- Time in the home – Will you stay put long enough to recoup costs?
- Tax benefits – With a shorter term, you get less mortgage interest deduction.
- Investment opportunities – Money freed up sooner could be invested profitably.
Analyze the pros and cons for your specific situation. Run the numbers for both options. Either can potentially be the better choice depending on your personal financial profile.
Who is a shorter mortgage term better for?
Here are some types of borrowers who may benefit more from a shorter mortgage term:
- Those with stable, higher incomes
- People who value being debt-free
- Those wanting to build equity faster
- Borrowers able to make larger monthly payments
- People who don’t move frequently
- Those wanting to pay off their mortgage by retirement
Who might want to opt for a longer mortgage term?
Here are some instances where a longer mortgage term may make more sense:
- First-time homebuyers on tighter budgets
- People who move more frequently
- Those who value financial flexibility
- Borrowers who can invest extra funds profitably
- People who want a larger mortgage interest tax deduction
- Those not planning on staying in the home for more than 10-15 years
Tips for deciding between 15 or 30 year mortgage
Follow these tips when weighing your options:
- Calculate the costs – Look at total interest paid, monthly payments for both terms.
- Factor in your timeline – How long do you plan to be in this home?
- Consider your other goals – Will the higher payment crowd out other priorities?
- Think about risks – A shorter term provides safety from interest rate hikes.
- Consult others – Talk to a financial advisor or mortgage broker.
- Run mortgage calculators – Input different scenarios to compare.
- Be conservative – If it’s close, lean towards the more affordable 30-year.
- Think long-term – Consider where you want to be in retirement.
Taking the time to analyze both options carefully will ensure you select the right mortgage term for your needs and financial situation.
Conclusion
Deciding between a 15 or 30 year mortgage term involves weighing several factors – monthly payments, interest costs, financial goals, job stability, and more. While a shorter 15-year term often results in substantial interest savings and faster home equity building, the higher payments may not suit everyone’s budget or goals.
Crunching the numbers for your specific mortgage amount and rate, projecting your income and job outlook, and thinking carefully about your timeline and financial priorities are key to choosing the term that’s right for you. With mortgage rates still near historic lows, it may make sense to lock in a low rate now with a 15-year loan, but a 30-year term provides more flexibility.
There’s no one-size-fits-all answer. The better option depends on your own unique situation. Do your homework to understand the tradeoffs, run mortgage calculators to compare scenarios, and consult financial advisors to decide if the benefits of a shorter mortgage outweigh the costs and risks for your needs.
