When it comes to fixed-rate mortgage loans, borrowers are usually faced with two choices: a 30-Year Fixed-Rate Mortgage or a 15-Year Fixed-Rate Mortgage. There are some key differences between these two loan types that will play a role in deciding which one is the best fit for borrowers.
The Standard: 30-Year Fixed-Rate Mortgage
The 30-year fixed mortgage is the tried and true mortgage product for many people.
30-Year Fixed-Rate Mortgage: A loan that is paid off over the course of 30 years with a fixed interest rate. Over the course of this loan, the balance will amortize (gradually reduce) until it is paid off in full.
A lot of borrowers prefer this financing option because it offers the most stability and predictability over the long term. Almost 90% of home-purchase loans were 30-year fixed-rate loans.
Advantages to a 30-Year Fixed
- Affordable: Because the loan is amortized over the course of 30 years, payments are much more affordable. Many millennials choose a 30-year fixed because they are still in the early earning years of their careers.
- Stable: The interest on a 30-year is fixed, unlike adjustable-rate mortgages (ARMs). This means that interest will never fluctuate and the monthly payment covering interest and principal will stay the same over the course of the 30-year loan. There will be no surprise increases to monthly payment with a 30-year fixed.
- Flexible: 30-Year Fixed-Rate loans are generally pre-payable without penalties. If a homeowner chooses to pay off the loan early, refinance, or sell the home, the owner can do so without worrying about facing a prepayment penalty fee.
The 15-Year Fixed-Rate Mortgage
Fixed-rate loans are not limited only to 30 years. Borrowers also have the option to take out a fixed-rate loan for 15 years. In some cases, the 15-year fixed-rate loan can save borrowers money over the long term. There are some advantages and disadvantages to the shorter loan period.
Advantages to a 15-Year Fixed: Lower Interest
The biggest advantage to the 15-year fixed is that it has a lower interest rate than the 30-year fixed option. The lower interest rate is due to the fact that loan payments for the 15-year fixed-rate loan are paid over a shorter amount of time. Borrowers could also save money by simply not having to pay interest for as long as a 30-year fixed-rate loan.
Disadvantages to a 15-Year Fixed: Higher Payments
Using a 15-year fixed-rate loan will require a high monthly payment. Some borrowers are unable to make large monthly payments on their loans, so they ultimately will opt for the 30-year. We can best exemplify the differences in payments between the 15-year fixed-rate loans and 30-year fixed-rate loans with some simple math:
Let’s say a borrower has a total loan amount (principal and interest) of $1,000.
If a borrower took a 15-Year Fixed-Rate loan, they would be paying their balance of $1,000 over the course of 15 years —> $1,000 ÷ 15 = $66.66 total amount due per year, $5.55 per month + interest.
If a borrower took out a 30-Year Fixed-Rate loan, they would be paying their balance of $1,000 over the course of 30 years —> $1,000 ÷ 30 = $33.33 total amount due per year, $2.77 per month + interest.
You can see how borrowers who take out 15-year fixed-rate loans have to be comfortable paying double what their monthly payment would be than for a 30-year fixed-rate loan. This is a very simplified example of how loan payments work with 30-year and 15-year fixed mortgages.
How do you know which loan term is best for you?
Borrowers who are debating between these two loan programs should take into consideration the interest rates, and if they are financially capable of making monthly payments for each loan types. While the 15-year fixed-rate loan can save borrowers money, if the monthly payments aren’t do-able then the 30-year fixed-rate payment is the better option. It is always best to talk to a reputable local lender to get more information and find the right loan for whatever their financial situation is.