When it comes to the length of your mortgage, there is a fair amount of flexibility regarding term lengths, depending on which company you go with. By and large, 30-year terms and 15-year terms remain perennial favorites.
But which mortgage term is the right one for you and your household? Well, that depends on your situation and financial goals.
One of the most appealing aspects of a longer-term mortgage is that monthly payments tend to be lower, which makes it a more affordable option for many households.
“30-year mortgages are much more popular as the term is longer and the payment lower,” says Melissa Cohn, Executive Mortgage Banker at William Raveis Mortgage. “With real estate so expensive these days, affording a home is an issue with many, and the 30-year makes homeownership much more accessible.”
But of course, there are pros and cons to both options. To help you make the right decision for which mortgage option works for you, we asked real estate and mortgage experts about what you should keep in mind.
If you’re looking to build your savings, or you have expenses such as your children’s education to consider, the 30-year-mortgage might be your safest bet. “The main advantage is a lower monthly payment, which could allow a borrower to put that excess cash into savings or afford a larger house,” says Chuck Meier, SVP Mortgage Sales Director at Sunrise Banks.
Of course, nothing is perfect. Not only will it take you much longer to pay off your home, but Cohn says “you pay twice as much interest over the life of the loan.”
When you make a mortgage payment, you’re both paying off the principal of the loan, as well as the interest rate. The longer you’re making payments, the longer you’re paying interest. A shorter term length means that in addition to owning your home faster, you‘ll pay less in interest, and thereby save money in the long run.
Your exact interest rate will vary by your financial situation, FICO score and the current national interest rate. But according to Meier, you might be able to get a lower interest rate from your lender if you choose this option.
“With the 15-year mortgage, you’ll have a higher monthly payment, but you might be able to get a lower interest rate,” he says. “A lower rate – and a shorter loan period – means that you might ultimately pay less on a 15-year mortgage in interest over time.”
For instance, Meier says that with a $100,000 loan at 3%, here is what will go to interest, based on the term of the loan.
15 Year Payment = $690.58, Principal paid is $555.56
30 Year Payment = $421.60, Principal paid is $277.88
To give another example, Diane Hughes, SVP/Director of Mortgage at UMB Bank, says that “if you borrow $200,000 at 3% interest for 15 years and no cost associated with the loan, you will pay approx. $48,600 in finance charges, which is the total interest you will pay over the life of the loan.
The finance charge for a 30-year loan with the same terms is approx. $103,500,” she says. “The 15-year mortgage will save you almost $55,000 over the life of the loan compared to the 30-year mortgage.”
The main drawback, according to Meier, is “when your loan period is shortened, you’ll likely need to pay more for your mortgage each month,” which might not be an option for some households.
To give you another way to look at, here are the monthly payments for A $250,000 house, with a 20% down payment and the current interest rate of 3.2%, for both a 15-year and 30-year term.
| Length of Term | 15 Year | 30 Year |
|---|---|---|
| Monthly Payment | $1,751 | $1,081 |
For a further breakdown, here’s how much total interest you’ll pay over the course of the loan, and how much money might go to your interest, for a $250,000 house, with a 20% down payment and the current interest rate of 3.2%, for both a 15-year and 30-year term.
| Length of Term | Total Cost Of Mortgage | Total Amount Of Interest Paid |
|---|---|---|
| Monthly Payment | $315,109 | $1081 |
| 30 Year | $389,220 | $65,109 |
While the cost of your monthly payment versus saving money on interest rates is going to be your main consideration when choosing a mortgage, it’s not always quite so cut and dry.
Not everyone has the money on hand to afford a 15-year-loan, and banks are more likely to loan to you if you take the 30-year-option. “The lower the payment, the easier it is to qualify,” says Cohn. “Banks only look at the total monthly payment.”
However, it is worth pointing out that this might not always be the case, as there was some difference in opinions amongst the experts we talked with, so your experience might vary.
“The loan term has no bearing on how easy or quick a loan decision is made. Every loan is unique and approvals are based on a variety of factors that must meet regulatory, federal, state and lender guidelines,” says Hughes. “Consult your mortgage professional about the loan process and documentation expectations, so you have a great customer experience getting your next mortgage.”
It also needs to be pointed out that you have the right to change your mind. Let’s say you opt for a 30-year mortgage, and then your financial situation changes, perhaps because you get a new job or inherit money, and now you want to pay off your loan quicker. You can always look into a refinancing loan, in which a lender pays off your existing loan and offers you a new one at a lower rate. So if you have a windfall and want to go from a 30-year term to a 15-year one, that is an option.
And fortunately, because you’ve already gotten a loan before, it will be easier this time, according to Pat Stone, Executive Chairman and Founder at WFG National Title Insurance Company. “A refinance usually gets approved quicker,” he says, “as the homebuyer has been through the process of approval already.”
You also don’t necessarily have to change your loan terms if you decide you want to own your home sooner. There’s no rule that says you can just pay more than what your monthly mortgage calls for.
“Using the same 30-year terms above and paying an additional $100 per month will pay off your loan four to five years earlier and save you approximately $18,000 over the life of the loan,” says Hughes.
The quicker you can pay off your home, the better. Right? Well, maybe. A higher monthly payment might mean that you have less cash flow on hand, and less money to put away for savings, either of which could end up being a problem. “It makes little sense to pay off a mortgage faster if it leaves no savings for a rainy day,” says Stone.
Ultimately, it depends on “what your goals are,” says Cohn. “Do you want to be debt-free? Then consider the 15-year. Are you concerned about affordability, then take the 30 year.”
Ultimately, take a look at your financial situation. If you have the money for a 15-year term and you like the idea of being debt-free, then that’s an option. But if you have auto-payments, insurance bills or a college loan to consider, make a budget to figure out what monthly payment might make sense for you.
“The 30-year is a better cash flow tool. The 15-year builds equity faster,” says Cohn, which is to say, the total value of your household. “If you can afford the 15-year and want to build equity that you can roll into your next home, then it is a good ‘forced savings,’-mode. If you are worried about where real estate values are going, then look at the 30 year – less equity at risk.”
No one knows what the future holds, and even if you aren’t sure if you will be in your home 30 years from now, that doesn’t mean you should automatically disregard it as a loan option.
“Most borrowers don’t stay in their home for 30 years. The 30-year mortgage allows you to have a reduced payment which would free up disposable monthly income for other goals in your life,” says Hughes. “Your home is an asset and once you have established equity in your home, you can leverage your equity to consolidate debt and finance other large expenses. Always consult with a mortgage professional to identify all the loan options and what makes sense for your goals and future needs.”
If you decide you don’t want to live in your home anymore but haven’t paid of your mortgage yet, Stone points out that “if you want to move before your 30-year term is up,” then you have the option to “rent out the old place,” which could help take care of payments while you focus on paying for your place.
But this is where the 15-year term has an advantage, as Cohn says that
“If you can afford the 15-year and want to build equity that you can roll into your next home, then it is a good move.” After all, the quicker you own your home, the faster you can sell it.
So ultimately, both 15-year and 30-year terms have their selling points. Remember that your lender is there to guide you through the process and help you find an option you can feel good about, so take your time and figure out if you want lower payments over more time, or higher ones in a short time frame.
Once you’ve determined which loan term length is right for you, we recommend locking in your rate with QuickenLoans, our #1 recommended mortgage lender. They will help guide you through the process of getting a quote or becoming pre-approved.
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