15-Year Versus 30-Year Mortgages

There has been much speculation over which mortgage plan is better: the 15-year or 30-year mortgage. Besides the obvious difference in the length of the contract, there are a few other factors that must be considered before making a decision.

Interest Rates

Generally speaking, the interest rate on the 15-year mortgage will be less than that of the 30-year mortgage. The biggest difference lies in the interest rate spread, or the yield being charged by the bank over a specific index depending on the risk of the transaction. The general rule with interest rates is that the wider the spread, the more beneficial the 15-year mortgage is. When the spread is closer to the real interest rate, the 30-year mortgage is more cost-efficient.

Monthly Income

It is very important to consider your monthly income when determining which mortgage is best for your personal needs. The general scale that should be used is the 40-hour work week. It is ideal to keep your mortgage payment at approximately 30 percent of your monthly income. Once the percentage jumps above 35 percent, it is common for the payment to become a burden. Consider what you can afford before choosing a mortgage plan.

Spending Habits

You must also consider your usual spending habits when considering which mortgage to undertake. With a 30-year mortgage, you will most likely have extra money to spend, because your monthly payments will be much lower. If you choose a 15-year mortgage, you will have less spending money but will also be that much closer to paying off your biggest investment--your home. After that point, the only housing payments you will have to worry about will be property taxes.

Solution

The loan that generally makes the most sense for people is the 30-year mortgage. With lower monthly payments and the flexibility to pay extra and retire the loan before its expiration date, many people choose this option. While it does usually come with a higher interest rate, most people prefer to have extra money for necessities and unexpected expenses and therefore opt to go with the longer-term mortgage plan.

Considerations

Be sure to examine your personal financial situation carefully before choosing a mortgage plan. Each individual has personal financial circumstances to consider and must therefore make a decision that fits with personal needs. It is best to consult a mortgage professional to examine your options and the most recent interest rates available.

References

• Mortgage Information
• Interest Rate Spread Definition