What are the Benefits of a 15 year loan Versus 30 year loan?
Less Years = Lower Rates…Most of the Time
In short, you generally get a lower interest rate with a 15 year mortgage loan compared to that of a 30 year mortgage. Which means you will be paying less interest over the course of your loan. Usually, the lower the years of the term the lower the interest rate. (And I do mean usually, because MortgageLoanReviewUSA.com, that analyzes the fairness of loans, has seen on occasion 10 year terms having higher interest rates than 15 year terms.)
The 30/15 Year Compromise
Affordability is the number one reason people choose a 30 year term. This allows them the ability to buy more house and/or have lower monthly payments over the course of their loan. Of course, this costs them in the long run as far as total interest being paid. However, if disciplined enough, you can obtain a 30 year loan and add to your monthly payment what you would be paying for a 15 year loan. This is favorable to those who want to pay off their mortgage early, save some interest, but also remove that risk factor of being locked into a 15 year loan, having a job loss and not being able to afford the mortgage payment (or at least things being that much tighter on the wallet.) Generally speaking, there is anywhere between a 0.5% to a 1.0% difference in interest rate when it comes to 30 and 15 year mortgage terms for Conventional loans. (FHA and VA loans tend to have a larger spread.) We will use 0.75% as the difference in interest rate between a 30 year term and a 15 year term. Let us go through an example to see what the actual difference would be. Then compare it to real life among the average homeowner.
Example: $300,000 mortgage
- 30 year at 5.25% – $1656.61 monthly; $296,380 total interest
- 15 year at 4.5% – $2294.98 monthly; $113,096.38 total interest
- 30 year added payment at 5.25% – 2294.98 monthly; $146,016.02 total interest
Being at a straight 30 year mortgage term means a ridiculous 183k more in interest compared to the 15 year term. However opting for a 30 year and being disciplined enough to set up the additional difference in payment would mean you’re paying roughly 33k more compared to the 15 year term. Again, the benefit in this is that if you ever had a decrease in income, or wanted to save for that yacht, you would have the option to stop putting the additional $638.37 on top of the $1656.61. (638.37 1656.61=2294.98)
Now I mentioned comparing it to real life among the average homeowner. Two things: 1) Some may lack the discipline to set up the additional payment amount or are tempted to cave and remove it to go on a shopping spree. 2) In recent years, most homeowners resided in their home for an average of 10 years. With the example above ($300,000), we can see what the first 10 years of interest payments would look like:
- $145,713.74 in interest paid in the first 10 years of the 30 year loan
- $98,960.51 in interest paid in the first 10 years of the 15 year loan
- $121,413.88 in interest paid in the first 10 years of the 30 year loan with added payment
Being at a straight 30 year term means 46k more in interest paid during the first 10 years compared to the 15 year term. And with the 30 year added payment scenario, you would be paying about 23k more in interest compared to the 15 year term.
What it Means
To sum up, keeping your payments the same, in the average homeowner real life scenario you would save about double the interest by choosing the 15 year term as opposed to a 30 year term with the added payment. But as mentioned, a risk with the 15 year would be if you needed to lower your monthly payments for whatever the reason. If you did need to lower the payments on a 15 year loan you would only be able to do this by refinancing into a longer term. Refinancing would cost money, could lead to a higher interest rate (or lower depending on the market) and may not be an option if there was a large decrease in the value of the property, income, credit score etc… Sadly, this is how some people end up losing their home. Regardless of what mortgage you end up going with, make sure that you are getting a fair deal. Either do this by shopping around comparing multiple Loan Estimates, or by getting a 3rd party review of your mortgage before signing with Mortgage Loan Review USA. You’d get a home inspection, why not a loan inspection?