As their names suggest, the main difference between a 15-year and 30-year fixed-rate mortgage is its duration. If you make your regular monthly loan payments on time every month, you'll pay off a 15-year fixed-rate mortgage loan in 15 years. You'll pay off a 30-year fixed-rate loan in 30.
There's another big difference that comes with these loans: The average mortgage interest rate on a 15-year loan is lower than it is on a 30-year loan. Does that mean that a 15-year fixed-rate loan is the best financial choice? Not necessarily.
Pros and cons
The main benefit of a 15-year mortgage loan is that you'll pay far less in interest during the life of the mortgage. This can save you hundreds of thousands of dollars if you pay off your loan.
For example, if you take out a 30-year fixed-rate $200,000 mortgage with an interest rate of 3.96 percent, you'll pay $142,080 during the life of your loan in interest. If you take out the same loan at the same rate but for a period of just 15 years, you'll pay just $65,566 in interest over the life of the loan. That would be a savings of $76,514.
Again, though, that does not mean that the 15-year loan is necessarily the best choice for you and your family. Even though a 15-year mortgage comes with a lower interest rate, your monthly payment for such a loan will be higher than it would be with a 30-year fixed-rate loan. The reason? In a 30-year loan, the monthly payments are portioned out over a longer period.
Here's an example: For that 15-year fixed-rate loan of $200,000 at an interest rate of 3.22 percent, you'd face a monthly mortgage payment of $1,402. If you instead took out a 30-year fixed-rate mortgage loan of $200,000 at an interest rate of 3.19 percent, you'd pay $863 a month.
The question, then, comes down to this: Can you comfortably afford the monthly payment that comes with a 15-year fixed-rate loan? If so, then taking out one of these loans might be a better choice because you'll waste less money on interest. However, if you cannot stretch your household budget to cover that 15-year monthly payment, a 30-year fixed-rate mortgage loan might be a better choice.
Learn more about the mortgage options available at Old National.
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