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30-Year or 15-Year Mortgage: How to Decide

When you are ready to go and purchase a home, there are plenty of decisions that you will need to make. It is likely the largest asset you will ever own, and probably the most expensive thing you will ever purchase. Traditionally homeowners will finance their home with a 30-year mortgage, but you may have been hearing advertisements and buzz lately about how low a 15-year mortgage rate can be (the average is around 3 percent right now) compared with a 30-year loan (average around 4.5 percent).

While 30 years is generally the standard, there are no hard and fast rules that say you must get a loan for that long, and there are definite financial advantages to getting a shorter-term loan of 15 years.

Advantages of 15 Years

Perhaps the main reason someone might consider getting a loan for 15 years is that you can pay off the mortgage faster. If you are worried about saddling yourself with that big a debt for a long period of time, a 15-year mortgage cuts that commitment in half.

Another benefit is the potentially huge interest savings over the life of the loan. If you get a $250,000 loan at today’s interest rate of 4.5 percent, you will pay over $206,000 in interest during that time period, almost doubling the actual cost of your home. With a 15-year loan at today’s rates, you will pay only about $63,000 in interest—a savings of $145,000.

With a shorter loan, you will pay more toward the principal balance up front, which allows you to build equity in the home faster. Equity is the difference between your home’s total value and what you owe, which represents your profits if you sell the house.

Since a mortgage loan is likely to be your largest single expense every month, paying it off more quickly can also help you free up your finances so you can cut back on work hours, travel more, and enjoy the freedom of not paying on a mortgage.

Advantages of 30 Years

A shorter loan is not for everyone, and there are advantages to getting the more traditional 30-year mortgage loan. First and foremost, financing over a longer period of time means your total monthly payments will be lower. If you will have trouble affording the payments for a 15-year loan, a 30-year loan can allow you to get the home you want.

There is also an opportunity cost associated with the shorter loan—that money you are paying toward a house payment now could be used to bolster your personal savings, reduce your revolving credit card debt, make home improvements, or put into a retirement account.

The great thing about a 30-year loan is that there is often no penalty for early payment, so you can get approved for the lower payment now, then when you have extra money you can pay that toward your principal balance, thus achieving the benefits of paying off your loan sooner and paying less interest, but without saddling yourself with a high 15-year payment.

No loan is right for everyone, so you should review your personal financial situation and your goals before you decide on which loan to go with, then make the decision that is best for you.

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