15-year versus 30-year Mortgage

Darryl Bachmeier
Jul 24, 2020

Welcome to adulthood! As you embark on the real world, one of the things you will probably be more excited about is ownership. What is more amazing in having your own place, right? But at around the same time, you realize that you cannot afford it. The reality of mortgage now dawns on you.

A mortgage is a type of loan that is repaid in terms. It is commonly used to purchase homes or cars or something that is high priced. Homes are usually paid in 15 or 30-year terms.

And today, we will explore the key differences between the two aside from the obvious timeframe of repayment. This is to hopefully help you arrive at the best option that will give you the flexibility and value for investment the most.

Is the Longer, the Better?

On the surface, we just know that your mortgage plus the interest will be divided into equal repayments spread on either a 15 or 30-year term. The simplified take on this is understanding the concept behind fixed-rate mortgages or equity.

Most loaners or first-time mortgagers choose this over adjustable-rate mortgages wherein the monthly payment will be re-evaluated annually and will be based on the calendar year’s prevailing interest rate. Opting for the former will refrain you from getting surprises along the way.

Meanwhile, back to the calculator, essentially, you will be paying small monthly payments if you stretch the term, right? But, if you will go back to multiplying all your mortgage payments and compare the term, that is where you will see the key difference.

A 30-year mortgage term is more expensive to pay than its 15-year counterpart.

Doing the math, the culprit is the compounded interest and inflation.

Now, with a few hundred bucks difference in payments monthly, you will become free from debt at half of the period with a 15-year mortgage.

More often, the psychology of shelling lower monthly payments gets to us. With our purchasing power relatively remains strong despite being on a loan, it provides us more ways to spend our money on. We can still accommodate extra savings, invest in other vehicles, take vacations, or buy things.

For some people, the setup works because they do not feel too restricted when it comes to cash flow. Also, it gets uncomfortable to allocate most of your income to pay off a debt.

Meanwhile, some people prefer to set long term goals. They choose to finish off debt early so they can re-allocate their income again. Getting off a big debt early means you can still make big-ticket purchases while you are still in the prime of your income capacity.

Is the longer the better? Yes and no.

If you are after paying off a smaller interest, go for the lesser term.

If your appetite risk is less, you can opt for a longer-term and then try to pay off as early as possible.

It ultimately boils down to preference and goals.

How Do You See Yourself 15 or 30 Years from Now?

Now, to set you in a clearer direction, how do you want to see yourself 15 or 30 years from now?

From the perspective of a better deal, let’s now look at it through the lens of the future.

A 15 year or 30 year-term becomes the point of the decision if you have specific goals in mind.

Are you aiming to be debt-free when you are in your 40s? Are you looking at transferring to a different state in less than 15 years?

For some, it is challenging to make long-term goals. The uncertainty of life makes it hard to predict the future of your finances. With this, opting for smaller monthly payments seem to be a more sensible option. And then what remains from your current income enables you to be flexible with your finances. It is about you being ready with extra cash in your pocket to seize an irresistible opportunity along the way.

Envisioning yourself in 15 or 30 years from now can help you set the course early in your decision-making.

Some Points to Consider

Now when it comes to loans, it is not just all about your preference. There are certain conditions that you must meet first to qualify for the mortgage term and lower interest rate you are aiming for.

Banks or lenders still conduct a prior assessment of your capacity to repay the loan. So, if you are uncertain about your ability, these people are professional in checking your potential - assets included. Your credit score also matters here. You can follow their recommendation since these institutions prefer to receive their money back plus earned interest, after all.

Purchasing your home through a mortgage is a combination of guts, goal-setting, time management, and making money work for you. It could be a life-altering decision so make sure you weigh all the consequences before making your choice between a 15 and a 30-year term.

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