How to Compare a 15-Year Mortgage With a 30-Year

A mortgage is a loan on a piece of property.

The two most commonly used mortgage term options are 15- and 30-year mortgages. When comparing the two, the most obvious difference is the monthly payment. The "sticker shock" of the 15-year payment tends to cause many mortgage borrowers to opt for the 30-year option to keep the monthly payment significantly lower. Compare the two options by looking at the APR (annual percentage rate) to find the lowest cost option.

Things You'll Need

• Truth-in-lending statements
• Good-faith estimates

Instructions

1. Ask your mortgage lender to give you a good-faith estimate and truth-in-lending statement on a 15- and 30-year mortgage. Make sure that the loan amount is the same on both mortgages to compare the same information.

2. Note the difference in the interest rate. The 15-year interest rate should be lower than the 30-year interest rate.

3. Note the closing costs as listed on the good faith estimate; aside from the daily interest expense, the overall closing costs should be close to identical.

4. Review the truth-in-lending statement. The first box on the page lists the APR (annual percentage rate). This is the numerical representation of the total cost for the mortgage for a full year, including both the monthly interest rate and the closing costs. The loan with the lowest APR is the lowest-cost mortgage option.

5. Choose the mortgage option that works the best with your budget. In the long run, the 15-year option will be the cheapest, but if the monthly payment is too high for your budget, it is not the best option for your family.

Tips & Warnings

• Many borrowers create their own 15-year mortgage by making a 15-year mortgage payment on a 30-year fixed mortgage. By selecting the 30-year option, the borrower gets to pay the lower monthly payment during the months where the budget is tight and the higher monthly payment in the months where there are excess funds. On a 30-year fixed mortgage, one extra monthly payment per year cuts the term by seven years, and two extra payments cut the mortgage term almost in half.

• Be sure that you can qualify for the higher mortgage payment associated with the 15-year mortgage before going through the decision process. If you cannot qualify for the higher payment, the decision has already been made for you by the mortgage company.

References

• Federal Reserve: Looking for the Best Mortgage
• U.S. Department of Housing & Urban Development: Good Faith Estimate
• Lending Tree: Truth in Lending Statement
• Kiplinger: Extra Mortgage Payments Can Pay Off