30-year or 15-year mortgage?

December 2, 2013

Click Image to view larger

For most Americans, making a new home purchase is one of the biggest decisions they will ever make and it is likely that a home will become their largest asset. At such a high sticker price, homeowners often will buy a property with the help of a mortgage that they pay off over time. When it comes to choosing a mortgage, there are several options out there with different loan terms that affect how much and how long a borrower pays. 

In general, there are two different loan types for fixed-rate mortgages. Fixed rates are those that don't change over time. Once you lock in an interest rate, you pay the same amount each month until you pay back the loan, refinance or sell your home. For fixed-rate mortgages, you can apply for either a 15- or a 30-year loan.

15-year
Loan terms that are shorter simply mean that you have to pay back the loan sooner, and therefore mortgage payments are higher per month. There are some benefits to doing this, including paying less interest in the long run - so the loan costs less overall. Higher mortgage payments can be more difficult for families who have fewer liquid assets for month-to-month expenses.

The first question a borrower should ask when deciding between a 15- and 30-year loan is whether or not they can afford a shorter loan term. If higher monthly mortgage payments are affordable, choosing a 15-year loan can save money that would otherwise be spent on interest.

30-year
Homeowners who opt for a 30-year loan will end up with lower monthly mortgage payments. For first-time home buyers this is often a good choice, as it can make a pricier home more affordable. The trade-off is that the borrower will have to pay more in interest over the years, but if they plan to stay in a home for a long time, it might be worth it. 

With a 30-year loan you can also refinance into a shorter-term mortgage. Since interest rates have fallen to low levels after the recession, now might be a good time to refinance. Depending on your current monthly payments for a 30-year loan, you may be able to shorten the terms through refinancing into a 15-year term for similar payments. When mortgage rates are low, refinancing into a 15-year loan could be more cost-effective in the long run.

Contact the Federal Savings Bank, a veteran owned bank, to find out more about affordable mortgage loans.