30yr Mortgage Vs 15yr Mortgage – Which One Is Better?
You’ve found the perfect home and now it is time to settle on a home loan. With many loan terms and interest rates available through every bank, it can be overwhelming to decide on the best payment terms. 30-year and 15-year mortgages offer different incentives for every homebuyer, based on your financial stability and personal goals.
Regardless of current rates, 30-year mortgages always have a slightly higher interest rate. For example, a 30-year is offered at 4.5 percent with a 15-year at 3.75 percent. This interest difference may not seem large, but over time, the bank collects substantially more money on the 30-year compared to the 15-year.
Interest As A Tax Write-Off
If you simply want a lower interest rate to pay the mortgage off faster, a 15-year loan is the obvious choice. Many homebuyers, however, are looking for long-term tax write-offs, especially if they are married. A higher interest rate on a 30-year gives the owners a substantial tax deduction each year. This deduction may offset other factors, including a high income tax bracket. You essentially use the interest to lower your income level and reduce taxes.
Make Extra Payments
If you have a 30-year loan and want to reduce your debt amount quickly, you can make extra payments each month to pay the loan off in a 15-year period. Each mortgage payment gives you an option to add an additional amount to the principal. Adding several hundred dollars to each monthly payment quickly pays down the balance and reduces your loan duration.
If you ever encounter financial difficulty such as losing your job, a 15-year loan is extremely difficult to pay each month. Because it has a high monthly payment, unemployment may cause you to fall behind on bills. You cannot refinance the loan when you are unemployed to extend the payment terms and lower the monthly payment. 30-year loans, with their lower monthly payment, allow you to pay the monthly amount without too much difficulty, even in an unemployed situation.
Avoiding Missed Payments
Deciding on a 15-year loan requires some preparation on your part. To protect yourself from life’s unexpected events, from unemployment to severe injury, build a substantial emergency fund. These funds can be used toward a high, 15-year mortgage payment, if necessary. A 30-year loan does not require such a large savings fund, but it is always financially sound to have a cushion during hard times.
Saving for retirement is a critical part of your financial success. If you cannot set aside a comfortable amount for retirement each month, choose a 30-year loan. The longer payment period frees up extra funds each month toward your retirement fund. Many corporations match your contributions, making it even easier to build a substantial retirement savings account. Always invest at the matching percentage to get the most out of your retirement account. A 15-year loan may take too much of your current income and hinder your retirement plans.
Overall, a 15-year mortgage allows you to own your home faster, but with more financial commitments compared to a 30-year loan. Evaluate your income and choose the loan that allows you to achieve all your financial goals.