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15 vs. 30-Year Mortgage

Will 15-year mortgage work for me?

This question seems rather popular this days. With the rate drop over the last few month the interest towards the shorter term mortgages has grown in proportion. Of course, there are quite a few advantages to the 15-year term, however, at the same time, there are a few things to consider.

Well, let’s take a look at the differences between a 15 and 30-year terms.

As we mentioned above, there are a few advantages to the 15- year term. First goes without saying, the 15 year term is just a half of the 30 year term. However, it is important to keep in mind that since the loan is not as “stretched out” your monthly dues will be higher.

Yes, having a higher monthly payment might be scary, but let’s look at the bigger picture. The rates for 15 year term go as low as 2.75%, whereas, a 30 year term would rarely go lower than 3.5%. Which means, that less mortgage interest will be accrued each month.

In other words, if we combine a shorter term with lower interest we get a homeowner who was able to save hundreds of thousands of dollars. This scenario looks appealing, isn’t it?

Well, here’s another advantage of a 15 year term – the 15 year fixed rate mortgage is designed to aggressively pay down your principal. To compare, at today’s rates with 15 year fixed rate mortgage the first payment is 66% principal and 34% interest, whereas, with 30 year fixed mortgage only 35% goes towards your principal. In addition, with the 30 year fixed rate mortgage your payments do not include the same principal to interest ration until your loan reaches 18 years.

Let’s get back to original question: will 15-year mortgage work for you?

Before we can answer this question, there are a few things to take into consideration. Yes, the 15-year term mortgage can provide a sizable long-term savings in comparison with longer term loans. However, this term does not fit everyone.

As mentioned above, your monthly premiums will be higher with the 15 year term, which can be a budget-breaker for some households. The same reason, could make it harder to qualify for such loan because of the debt-to-income ratio required by the lender. So, talk to your broker to determine if 15 year term would be a good move for you.

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