How quickly would you prefer to pay off your new iPhone – within a year or 2 years? You end up paying back about the same amount for the same product; you just pay a different amount per month. This example is a direct analogy of the difference between a 15-year fixed-rate mortgage loan and the same 30-year loan.
A 15-year fixed-rate loan will pay you back twice as fast as the same 30-year loan. On the other hand, a 30-year loan will cost you less in terms of monthly payments.
For say, if you want to buy a home in Tarzana, CA for $900,000, then this property is available for $4,238 per month with a 30-year fixed loan at 3.211% or for $5,960 per month with a 15-year fixed loan at 2.489%. Estimated monthly costs calculated with the assumption of 20% down payment and include property tax and home insurance.
Note that you will pay lower interest on a 15-year Fixed Income loan than you would on a 30-year Fixed Income loan. Also, with a 15-year loan, you will reduce the difference between the mortgage debt and the actual market value of the property you are buying much faster. With these nuances in mind, you may want to weigh the pros and cons more carefully. The mortgage payment will be higher because it will be paid off over a shorter period of time. If you have doubts about your ability to pay it back, a 30-year fixed-rate mortgage may be more reliable.
30-Year Loan Advantages
Everyone’s financial situation is different to handle, but if you are interested in paying less per month, a 30-year mortgage may be the best option of all. Stretching your loan payments over 30 years will allow you to free up more money each month to spend on other things. For example, if you want to increase your savings for unexpected purposes, are engaged in investing or are saving large amounts for retirement, you can focus your efforts on these tasks. A 30-year loan will provide you with a more solid home than you would have bought with a 15-year loan because the cost of the loan is spread out over a longer period of time. If your family is growing or you want to buy a home for the future, a 30-year loan can help you expand your finances quickly.
15-Year Loan Advantages
If you are not worried about the size of your monthly payments or focused on the ultimate value of your future home, a 15-year loan may not be a bad option. Your willingness to pay more every month will be rewarded: the house will be bought in half the time. If you have saved up for a rainy day and can pay your mortgage first, go ahead! Think about what size home you would like to end up owning: the bigger the house, the higher the monthly loan payments tend to be in both cases under consideration. If you have found a long-term home that is within the value of your loan, a 15-year mortgage might be a worthwhile option.
Team members at LBC Mortgage are always here to propose both options. Please feel free to call for more details.