Which is Better, 15-Year or 30-Year Mortgage?

The home loan or mortgage represents for most people the highest cost purchase they will make in their life, unless they buy a second house for even more. The reason being is because the financing involves a large amount of money being paid back slowly over a very long period of time. Even at a low interest charge level, mortgages are still going to produce a profit twice or three times over the original amount provided by a lender.

The most common mortgages involve fixed loans where the interest doesn’t fluctuate. These home loans come in either 15-year or 30-year formats. This of course eventually raises the question of which loan is better for a buyer, and it depends on the buyer’s individual situation.

Monetary Cost Difference

Clearly, paying a large home loan back in 15 years rather than over 30 years will be far cheaper. The shorter time period allows less compounding of interest and more money goes to the principal loan outstanding. As a result, the loan is paid off faster with less borrowing cost for the buyer.

For example, a $160,000 mortgage at 5% over 30 years versus the same amount over 15 years at 4.5%. The 30-year mortgage will cost $859/month, the buyer will lose $149,211 to interest charges, and the total cost will aggregate to $309,211 over the life of the loan. In comparison, the 15-year mortgage will result in a billing of $1,224/month, a lost cost of $60,318 in interest charges and a total loan expense of $220,318 over the life of the loan. The 15-year loan ends up being $88,893 cheaper.

Cash Flow Difference

On the flip side, the 30-year mortgage makes buying a home far more affordable on a monthly cash flow basis. Because the 30-year loan is paid over a much longer period, the monthly payment is far less. This makes the borrowing more affordable for those who can’t afford to pay out a couple thousand dollars of their income every thirty days. Using the same loan comparison example from above, the 30-year mortgage costs $365/month less.

Taxes

While there’s a lot of debate regarding the matter these days, the fact is a home mortgage provides a very helpful tax deduction on federal tax filing. The interest a homebuyer pays annually can be written against taxes owed, reducing that bite the IRS and federal tax law demands out of one’s income every April 15th. So the 30-year loan benefits a buyer on tax basis far more than a 15-year loan.

Alternatives

There is also an option of having both worlds. A buyer could start his home purchase off with a 30-year fixed loan, enjoying the lower payment per month but then work towards paying it off in a 15-year early push. This would produce a similar, high monthly cost at the 15-year level, but it would likely shave off close to $80,000 in expenses, depending on the details involved. This approach offers a valuable safety net as well. For instance, if the buyer ends up in hard, financial situation after the loan is started, he can always scale back the payment to a 30-year value without any penalty. This, of course, assumes the lender didn’t include any kind of an early payment penalty in the loan agreement.

Conclusion

As a result, the best home loan depends on the buyer's needs, wants and what he can afford to pay. The optimum loan is one with the most flexibility for the buyer, both cost-wise as well as on a cash flow basis. This ensures the probability of paying the loan without running into default problems.

Provided by: www.refinancemortgagerates.org

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