Buying a home, especially if you are a first-time homebuyer, can be a very confusing and stressful process. Unless you went to college for finance or work in a financial institution, it’s not really something that you would have ever learned and chances are you weren’t looking into getting a mortgage in your teenage years or early twenties. Now that you are looking, acquiring the proper knowledge can require a lot of time spent researching to figure out how to get a home mortgage and then figuring out the type of mortgage that makes the most sense for you. That’s what we’re here to help you with. Let’s look at the pros and cons of a 15-year mortgage and a 30-year mortgage, and figure out which of the two makes the most sense for you!
The 15-Year Mortgage
While 30 year mortgages are by and large the most popular type of mortgage to take out, a 15 year mortgage has quite a few unique pros that are unique to it. That, of course, means that a 15 year mortgage has its own unique set of cons as well.
The most obvious positive of a 15 year mortgage is that you end up having complete ownership of your home much more quickly than you would with a 30 year mortgage - exactly half the time. That shorter window of payments also allows for some piggyback benefits to arise, one of them being a faster path to building home equity; once you have adequate home equity, you unlock access to a whole new set of loan opportunities that will make your financial possibilities much more flexible, in the form of home equity loans. Additionally, a shorter home loan will ultimately be less expensive, because the shorter borrowing time-frame means a lower fixed interest rate. In other words, the shorter the home loan, the lower the interest rate, meaning amount paid on interest cost- and total cost-is significantly lower.
While that might make a 15 year mortgage sound like the obvious choice it of course comes with some caveats. Firstly, and perhaps most importantly. A 15-year mortgage is naturally going to have substantially higher monthly bills attached to it - around 50% higher than a 30-year monthly mortgage bill because you are paying off the loan in half the time. What this generally means is that you’ll have less flexibility to participate in other investment opportunities over the life of the mortgage, because a lot of your income is going to be tied up in that monthly mortgage bill. You will also likely have to settle for a less expensive property as higher monthly payments on a 15-year mortgage will exclude you from some properties that a 30-year mortgage would not.
The 30-Year Mortgage
The more common of the two loan options, a 30-year mortgage comes with its own set of pros and cons as well:
As we outlined earlier, a 30-year mortgage will have a significantly lower monthly bill when compared to a 15-year mortgage. Lower monthly payments will give you more financial flexibility to invest in other things that might, in the long term, be more positive for your financial health. 30-year mortgages are also quite a bit easier to qualify for because the amount you’re paying month-to-month is a much more financially accessible number. In turn, this will allow for you to more often than not qualify for a more expensive property than a 15-year mortgage would allow.
While a 30-year mortgage does have plenty of appealing pros, it comes with a few cons as well. For one, you are going to be paying, over the life of the loan, much more in interest costs overall and the interest rate will be higher than that of a 15-year mortgage. So, while a 30-year mortgage might fit more seamlessly into your monthly budgeting, at the end of the day, you will be paying quite a lot more for buying your property. It will also take you longer to reach the point of building usable home equity, and if you opt for a 30-year mortgage to purchase a larger home, your utility costs and property taxes will likely be a larger expense than they would be for a less expensive home purchased with a 15-year mortgage.
When you boil it down, a 15-year mortgage is the better option if you already have a good amount of financial flexibility available to you, while a 30-year mortgage makes more sense if you have some flexibility, but are more confident in a lower monthly bill over a longer period of time than you are in a more expensive bill over a shorter time period. When it comes to figuring out which mortgage makes the most sense for you, the most important thing is having a firm understanding of your personal finances and knowing what you can and can not realistically afford.
If you are still feeling a little uncertain, the folks at nerdwallet have a handy mortgage calculator that can help give you a better sense of what monthly payments would look like for a 15-year mortgage vs. a 30-year mortgage. Just be sure you plug in the HRCCU mortgage APR rates when doing the math - 3.125% on a 15-year mortgage, and 3.85% on a 30-year mortgage! HRCCU also offers a few other types of home mortgages, because we believe that a range of options is the key to allowing our members optimal financial flexibility. As always, if you have any other questions about the best mortgage for you, or any other questions related to your personal finances, we’re more than happy to chat!