15 Year vs 30 Year Mortgage

Have you ever wondered what’s the difference between a 15 and 30 year mortgage? And which one is better? Today I want to compare the pros and cons between a 15 year and a 30 year mortgage. Buying a home is one of the biggest purchases you’re going to make in your lifetime. The perfect situation is to buy a house in cash. But a lot of people don’t have that kind of cash, so they get a mortgage.

30 year mortgages are the foremost common with about two-thirds of applications being for 30 year mortgages. And upon final closing the statistics show that 30 year mortgages are used 86% of the time. It seems like 30 year mortgages are more popular, but that’s not necessarily true. Now lets talk about the pros of a 15 year mortgage. A 15 year mortgage will get you a lower rate of interest. The reason is because it’s less of a risk. So what does that mean? And why is it less risky? It’s because the term is shorter. For example, you’re a banker and you’re lending out money to someone to buy a home. The risk is less because the agreement is not as long. There’s also less things that can occur, whether it’s a injury or a job termination.

So a shorter term mortgage is looked at as less risky to the banks. And you can also pay the debt off in a shorter period of time. For example, you can borrow $100,000 as a mortgage. There’s going to be interest on top of that $100,000 as well, so you have two parts to the mortgage. The principal and the interest. When you make your monthly payments the loan is going to go down faster than a 30 year mortgage.

Now that I’ve touched on some of the pros of a 15 year mortgage here is one of the biggest cons, and that’s having a higher payment every month. For example, let’s use that $100,000, obviously your payments are going to be lower if you stretch it out over 30 years rather than stretching it out over 15 years. However, I will get into some of the reasons why some people may actually prefer the 30 year mortgage with a lower payment rather than having a higher payment of a 15 year mortgage.

Now let’s get into some of the pros and cons of a 30 year mortgage. The first one being lower payments. So the lower payments actually allows you to purchase more space than you could with a 15 year mortgage, because your payments are stretched out over 30 years. So this also will free up more funds for you to invest. As long as you’re earning more interest in your investments than your getting a postive return. So think about it if your interest rate on a 30 year mortgage is 4%, and your investments are earning you 7% that’s a difference of 3% over the course of 30 years.

Honestly, some people like the best of both worlds. What I mean is people take out a 30 year mortgage, and pay it off like a 15 year mortgage. So they still get into the house that they want, when they can afford the payments of a 15 year mortgage, but choose to take out a 30 year mortgage. This allows people to save money for unexpected expenses.