30 Year Vs 15 Year Mortgages

One of the big decisions you will be faced with when seeking out financing for your home is whether to go with a 30 year mortgage or a 15 year mortgage. This decision will have a profound effect on the size of your monthly mortgage payments, how quickly you pay down the loan principle and how much you will pay overall for financing. For this reason, it is not a decision to take lightly. You can begin your decision making process here with a little background information.

 

Interest Rates for 30 Year Vs 15 Year Home Mortgages

The first obvious difference is that you will pay more for your financing if you go with the 30 year mortgage, but not only for the obvious reason. Banks offer lower interest rates for 15 year mortgages than they do 30 year mortgages. It will vary according to the bank and market interest rates, but generally a 15 year mortgage will have rates of 0.5 percent to 1.0 percent lower than a 30 year mortgage.

 

Total Cost to Finance a Home

Overall, the amount you will pay to finance the purchase of your home will depend greatly on the term of the loan. Because of higher interest rates and the longer term, you will pay a great deal more to finance a home for 30 years rather than 15. As a quick example:

 

A home purchased at $160,000 will cost over $60,000 in interest with a 15 year mortgage at an interest rate of 4.5 percent. A 30 year mortgage at an interest rate of 5.0 percent will cost almost $150,000 to finance.

 

Your taxes and homeowners insurance will not be affected by the length of your financing, so your escrow account will be unchanged.

 

Building Up of Home Equity

With a 15 year mortgage, you will build up home equity at a much quicker pace due to lower interest payments and higher monthly payments to pay down the principle. This is helpful if you ever want to take out a home equity loan, or if you plan on selling your home before the loan is paid off. Another, smaller, benefit is that by paying down the loan faster, you can increase your credit score by improving your debt-to-income ratio. And, of course, there is also the satisfaction of owning your own home sooner and not having to make a monthly mortgage payment.

 

Monthly Payments of 30 Year Vs 15 Year Home Mortgage

When it comes to those all-important monthly mortgage payments that must be made, you will may much less with a 30-year mortgage. Using the example above for the $150,000 home, the monthly payment for the 30 year mortgage would be $859, while the payment with a 15 year term would be $1,224. The monthly difference of $365 means you can afford to pay other bills and it allows you to afford to own a home, or own a better home in a better neighborhood if that is your goal.

 

Shopping Around for the Best Mortgage Rates

No matter whether you choose a 30 year mortgage or a 15 year mortgage, you will want to be sure to take the time to compare bank interest rates. On loans with such a long lifetime, pennies saved can means thousands later. You can get the latest interest rates from banks offering home mortgages without needing a credit check. The few minutes you spend comparing current interest rates can save you thousands over the life of your home mortgage.

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