When securing financing for a home purchase, two popular options that future homeowners use are a 30-year fixed rate mortgage or a 15-year fixed rate mortgage. If you are not sure which one is best for you, here is some more information about them.
The reason that a 30-year mortgage is so popular among homeowners is that it offers the lowest payments over a longer period of time, making the loan very affordable. As the name implies, you will be paying off the home loan over 30 years, which will really stretch out those payments and make them as small as possible.
A 30-year mortgage will also ensure that the rate does not change. As long as you stay in the home and do not refinance, your payment in year 30 will be the same as the payment in year 1. When you factor inflation over the years, it means you should have no problem making mortgage payments later in life when the mortgage should be a smaller percentage of your income.
Your lender may also be more willing to approve your loan for a more expensive home when you have a 30-year mortgage. This is because your payments are more affordable, and will not cause your debt-to-income ratio to exceed 43% of what you make.
However, since those payments are spread out, you end up spending a lot more money on the actual interest of the loan rather than the principal. This means that if you sell your home in a few years rather than staying in it for the full 30 years, you will not have paid as much toward the home's equity.
The main benefit of having a 15-year mortgage is that it will have a lower interest rate than a 30-year mortgage. However, you end up paying the mortgage over half the amount of time, so the monthly payments are much higher. You'll also be free and clear of your mortgage after 15 years, meaning you can start saving up money towards retirement a lot faster.
Unfortunately, the higher payment amount means it may only be approved for a 15-year mortgage if the home is cheap. This makes the loan more practical for a small condo rather than a large house. The large payment will also result in putting less money into savings earlier into the purchase, which will not allow you to save up a large emergency fund.
If you can't decide, speak to a wholesale mortgage lender about which option will be best for your financial situation.