15-Year Vs. 30-Year Mortgage Rates
Home buyers who need to get a mortgage face an important decision as to whether they want to pay off their new loan over 15 years or 30 years. The question of whether to get a 15-year loan or a 30-year loan is also important for homeowners who want to refinance an existing mortgage. In either situation, the trade-offs include not only the payback period, but also the interest rate and the flexibility of the payments.
Other People Are Reading
-
Interest rate is lower on 15-year loan
-
The biggest reason to get a 15-year loan rather than a 30-year is that the interest rate will be lower on the shorter term because the loan will be repaid sooner and the risk to the lender of the borrower's default is less over a shorter payback period. That lower interest rate can result in significant savings in interest expense for the borrower over the life of the loan. The trade-off is that the monthly payment will be higher on the 15-year loan because the loan will be amortized over half as many years.
15-year is popular to refinance
-
Homeowners who want to refinance often choose the 15-year loan rather than a new 30-year loan because they've already paid off some number of years--perhaps five or 10 or more--of the existing mortgage and they don't want to restart their debt for another 30 years.
-
Savings can be big
-
Here's an example of the savings that can be achieved with a 15-year loan: Suppose the loan amount is $250,000 and the interest rate and payment on the 15-year loan are 4.32 percent and $1,889, respectively, and the interest rate and payment on the 30-year loan are 4.83 percent and $1,316, respectively. The total interest expense on the 15-year loan with the lower rate and higher payment would be $90,121 while the total interest expense on the 30-year loan with the higher rate and lower payment would be $223,832. The total savings over the life of the loan would be $133,710 with the 15-year loan.
15-year loan is less flexible
-
Despite the considerable savings in interest expense, the decision to obtain a 15-year loan instead of a 30-year loan shouldn't be made without serious consideration of the risk. That's because the longer loan term with the shorter payment offers more flexibility than the shorter term with the higher payment. If the payment on the 30-year loan is easily affordable, the borrower can make extra payments to achieve an outcome similar to the 15-year loan with the commitment to the higher payment.
Other factors to consider
-
The loan term and the associated interest rate and payment shouldn't be the only considerations in choosing a loan. Borrowers should also weigh and compare the costs of the loan, the points charged to achieve the desired interest rate and whether the interest rate is fixed or variable. If the rate is variable, the borrower should also consider the periodic interest rate cap and annual interest rate cap. All else being equal, the bottom line is that the 15-year loan offers a lower interest rate for borrowers.
-
References
Resources
- Photo Credit Roll of dollars image by Mykola Velychko from Fotolia.com
