Which Mortgage is Right for You: 15 or 30 Year?
For homebuyers, weighing up whether to opt for a 15-year or 30-year mortgage often feels like placing a one-shot bet at a casino.
That’s because, in reality, there isn’t much difference between the two scenarios. Get it wrong and you could literally lose the house. So, which mortgage is right for you? We discuss the details of each to help with your decision.
The most common loan you are likely to encounter is the 30-year fixed mortgage. You pay less each month over a longer period of time than you would with a 15-year loan, making this type of loan attractive to the majority of home buyers. There are a number of factors that come into play and it is useful to understand them with this type of loan.
DTI (debt-to-income) is the first thing to consider when considering loan type; as it is a factor lenders will look at. The debt payments you make each month should not exceed 36% of your income; inclusive of expected debts when you are settled in a home. Your mortgage payment contributes to those debts, so for many homeowners paying a lower amount makes sense.
The downside of playing it safe with your affordability and budget is you will potentially be faced with paying more than you would have with a shorter-term loan. Interest is based on your credit score and there are a number of different calculations which are used to determine what you pay overall with a 30-year mortgage.
When you look at a 15-year mortgage, it is more than likely true you will end up paying less overall and benefit from a shorter loan period because you are not paying a higher rate for 30 years. Lenders typically favor shorter loan periods as it reduces risk and increases the probability of loans being paid in full. 30 years is a long time, so if you are being overly cautious when it comes to what you can afford to pay each month, you are essentially keeping yourself in debt unnecessarily for longer. This is especially true for those home buyers who are likely to reach retirement during the period of the loan.
15-year loan repayments can be double that of a 30-year loan; accounting for a significant chunk of the budget for many people. If your DTI percentage is too high, you will find it almost impossible to qualify for a higher loan amount that would get you the home you want; forcing you to settle for a property that does not meet your needs.
15-Year vs. 30 Year Mortgage
With a 15-year mortgage, it is all about building equity in a property over a shorter period of time. You also pay a lower amount in interest and all payments are fulfilled in half the time. What you have to consider is whether you are prepared to settle for a home that does not have the space you would have wanted. If a smaller home works for you, the 15-year mortgage is a great way to go.
On the other side of the coin, you have the lower payment amounts afforded to you from a 30-year mortgage. This can make all the difference when it comes to getting by if your financial circumstances change for the worse. If a spouse loses a job or you hear the pitter patter of tiny feet, a 30-year mortgage may help you tighten your purse strings and still live comfortably.
Factors to consider with both may include your age, financial stability, future plans, and the type of home you want to purchase. If you opt for a 30-year mortgage and find you are experiencing better financial security than you had expected, you also have the opportunity to invest the difference between the lower and high rates in whichever way choose.
The fact of the matter is, both loan types have advantages and disadvantages that are relative to the borrower. While there are factors that the lender will take into account (such as DTI), your decision should ultimately come down to what you want from a home, how much you can afford to pay, and for how long.
Sit down and look at your long-term budget and any potential changes that are likely to occur during the course of the loan. Do you plan on having kids? Are either you or your partner due to retire before the loan is paid? What other major debts are you likely to accrue once you are a homeowner? These are the questions that will give you the truest indication of which mortgage type is the best fit.
If you need further help in deciding which mortgage type to choose, speak to Galaxy Lending Group today. Our mortgage lending team is here to help you achieve the financial security you need when purchasing a home.