Before applying for a mortgage, you will find that you have a lot of options in the market. Among these options, you will find mortgages in two major categories: 15-year mortgage and 30-year mortgage. You may either be attracted to a 15-year mortgage for its lesser duration and lower interest rate or to a 30-year mortgage for its lower monthly payments.
It is important to understand how payments work along with the structure of the loan with principal and interest repayments. You need to know your current as well as your future payment structure and take into account your age, years of employment, income, and other financial factors.
Here are some points to compare the two types of loans and understand what is right for you.
Lower interest rates and higher monthly payments
Even though a 15-year mortgage comes with lower interest rates as compared to a 30-year mortgage, a 15-year debt comes with a higher monthly payment which could take away a major chunk of your income till you pay completely pay off the mortgage.
So, if you have no issues with investing money for the future or for your retirement, you could do well with a 15-year mortgage. But if you want to take it easy and pay your debt while keeping the free money to invest in other goals or expenses, you’ll be better off with a 30-year mortgage.
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Is this your first mortgage?
If you don’t want to settle for a less expensive home because of budget constraints and if this is the first home you’re buying, you can opt for a 30-year mortgage.
Apart from these two mortgages, you can also take up adjustable rate mortgages, which offers a low and constant initial interest rate. These mortgages will make sense if you are sure of selling your house later since their interest rates increase with time.
Is refinancing an option?
If 30 years seem too long after you’ve taken the mortgage, you can refinance it into a 15-year mortgage later.
Retirement plans
If you’re about to retire soon, you will do better with a 15-year mortgage since you’ll be able to enter retirement free of debt and stress.
Discipline in your savings
If your saving scheme is not well followed by you, a 30-year mortgage might be a better option for you since you can keep some of your income for other investments while you pay your mortgage.
With a 30-year mortgage and a strict saving scheme, carrying a debt into retirement will cause any problems if you have saved money and invested for your retirement.
What you should completely avoid is having no savings at all and entering retirement with a mortgage.
Flexibility
- 30-year mortgage: You can try to pay off your 30-year mortgage earlier if you want, by paying extra whenever you can.
- 15-year mortgage: If you don’t trust yourself with saving or putting the extra cash in paying back the mortgage, you will be better off with a 15-year mortgage. Since the monthly installment will be higher, you will have no choice but to put in all your money into paying off your mortgage.
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