It’s mortgage matching time again: “15-year fixed vs. 30-year fixed.”
As always, there is no one-size-fits-all solution. because everyone is different And they may have different real estate and financial goals.
For example, it depends if we’re talking about buying a home or refinancing a mortgage.
or if you are first home buyer With nothing in your bank account or a seasoned homeowner near retirement.
Finally, for home buyers who can collect a low down payment. 30 year fixed rate mortgage Probably the only choice based on affordability and decent features.
so for some people The argument was not even an argument. It’s over before it starts.
But let’s explore the key differences between these two loan programs so you know what you’re into.
15 Year Fixed Vs. 30 Year Fixed: Which Is Better?
15-year fixed and 30-year fixed are two of the most popular home loan products.
They are very similar Both offer fixed interest rates for the entire loan term. but will be paid back in half
That can include disparities in costs and serious financial outcomes.
Although it is impossible to choose one or the other universally. But we can certainly highlight some of the benefits and drawbacks of each.
As seen in the chart above, the 30-year constant is cheaper when it’s monthly. But the long term is more expensive due to higher interest expenses.
The 30-year mortgage rate will be higher compared to the 15-year fixed rate payable for the convenience of an additional 15-year fixed-rate goodness.
At the same time, the 15-year fixed cost will cost more each month. But it can help you save quite a bit on a shorter loan term. This is due in part to the lower interest rate offered.
15-year fixed-rate mortgages are not as popular as they seem.
- Fixed 15 years is the second most popular home loan program.
- But it accounts for only 15% of all mortgages.
- Mainly because they are very affordable for most people.
- Monthly payments can be 1.5 times higher than the 30-year constant.
The 30-year fixed rate mortgage is the most popular loan program today, holding 70% of the market.
Meanwhile, 15-year fixed-income loans have about 15% of the market share.
the rest is adjustable rate mortgage Or some other fixed-rate mortgage, such as the lesser-known 10-year fixed.
Although this number may fluctuate over time. But it should give you some good information about the number of borrowers using a 15-year fixed rate versus a 30-year fixed rate.
If we delve deeper About 90% of home equity loans are 30-year fixed mortgages.. And only 6% are fixed 15-year loans, but why?
The simplest answer is that a 30-year mortgage is much cheaper than a 15-year mortgage because you have twice as long to repay.
Most mortgages are based on 30 years. amortization scheduleWhether it’s fixed or not (even ARMs) means they take a full 30 years to pay back.
Fixed 30 years is the most straightforward home loan program because there are no adjustments made during this industry standard 30 year period.
Short-term mortgages are too expensive for most homeowners.
long mortgage term A 30-year mortgage allows homebuyers to purchase expensive real estate without breaking the bank. Even if they get a low down payment.
But it also means that your mortgage payments will take a long time… possibly extending into retirement or pushing it further.
This increased affordability explains why it is so heavily advertised and touted by housing consultants and mortgage lenders.
Simply put, it is You can buy more houses. at a constant 30 years, which explains a 90% market share when buying a home.
meanwhile The 15-year fixed-rate market share is significantly higher. Refinancing a mortgage.
The reason for this is that borrowers don’t want to restart their clock once they’ve been paying off their loan for several years.
It’s also very inexpensive to go from a 30-year fixed to a 15-year fixed because your loan balance will be less after several years. And the interest rate will be lower as well.
This combination may make it more manageable to pay off a 15-year loan, especially when you’re taking the burden when it comes to home ownership.
Despite the immense popularity But there must be some drawbacks to a 30-year mortgage, right? Of course there is…
15-year mortgage rates are much lower.
- 15-year mortgage rates are lower than 30-year mortgage rates.
- How much lower the spread depends on the spread can change over time.
- It fluctuates with the economy and investor demand for MBS.
- You may find that 15-year mortgage rates are cheaper than 0.50% – 1% at any given time.
first of all You get a discount on a 15-year fixed versus a 30-year fixed in the form of a lower interest rate..
Although both offer fixed interest rates. But the costs are lower because you have less time to pay off your mortgage.
for that reason You’ll find that 15-year mortgage rates cost somewhat less than 30-year loan rates.
In fact, as of February 2, 2023. mortgage rate constant 30-year average of 6.09% according to Freddy Macwhile the 15-year constant is at 5.14%.
That’s a difference of 0.95% which should not be overlooked when deciding on a loan program.
In general, you may find that the 15-year mortgage rate is about 0.50% – 1% lower than the 30-year fixed mortgage rate, but this spread can and will vary over time.
I’ve created a 15-year fixed mortgage interest rate chart since 2000 using Freddie Mac’s June average, seen above.
ever since The lowest spread compared to the last 30 years was 0.31% in 2007 and the highest spread was 0.88% in 2014.
In June 2000, the average 15-year mortgage rate was 7.99%, while the 30-year was slightly higher, 8.29%.
So the last 15 years have wider spreads. although it has narrowed over time.
Monthly payments are higher for a 15-year mortgage.
- Expect mortgage payments that are about 1.5 times higher than the comparable 30-year constant.
- This isn’t a bad thing considering that the loan pays off in half the time.
- Just make sure you can afford it before committing to a purchase.
- There is no option to make smaller payments when your loan closes.
While the lower interest rates are certainly attractive. But a 15-year fixed-rate mortgage comes with a higher monthly mortgage payment.
Simply put, it took you 15 years less to pay back. which will increase monthly payments
When you have less time to pay off your loan You have to make more payments to pay off your balance.
The mortgage payment on a $200,000 loan will be higher than $386.10 because it is repaid in half the time.
Even with a lower 15-year fixed interest rate, monthly payments are about 32% more expensive.
For this reason, affordability may be a limiting factor for those choosing a shorter term.
Take a look at the numbers below using Freddie Mac’s average mortgage rates:
30-Year Fixed Payment: $1,210.70 (6.09% interest rate)
15 Year Fixed Payment: $1,596.80 (5.14% interest rate)
|Loan type||fixed for 30 years||fixed for 15 years|
|All interest paid||$235,852.00||$87,317.80|
Well, we know the monthly payments are much higher. but wait And this is a big deal.
you will pay Interest $235,852.00 On a full 30-year mortgage versus just Interest $87,317.80 In a 15 year mortgage!
That’s over $148,000 in interest. saved Over the term of the loan if you use a 15 year fixed as opposed to a 30 year mortgage. Pretty much, right?
Plus, you’ll be building the house much faster. This is because each monthly payment allocates money to the principal loan balance rather than interest.
But there’s another hurdle to the 15-year fixed option. It’s harder to qualify for because you’ll be making larger payments each month. which means your money The DTI ratio may be too high. the consequences.
For many borrowers extending home ownership, a 15-year mortgage isn’t even an option. The good news is I have a solution.
Most homeowners only hold on to their mortgage for 5-10 years.
- Consider that most homeowners will only keep their mortgage for 5-10 years.
- This means that the expected savings on a 15-year fixed mortgage may not be fully realized.
- But these borrowers will continue to reduce their loan balance much faster in the meantime.
Obviously, no one wants to pay $148,000 more in interest, but who said you would?
Most homeowners don’t see their mortgages in terms. This could be because they refinanced, prepaid, or simply sold the property and moved. Who knows if you can really benefit in the long run?
You may have a well-thought-out plan that collapses in a few years, and the rising monthly mortgage payments may come back to bite you if you don’t have enough savings.
What if you need to move and your home has depreciated? Or if you get a pay cut or lose your job?
No one foresaw the global epidemic. And for those with 15-year fixed mortgages, payment stress is likely to be much more important.
Ultimately, those large mortgage payments will become more difficult or impossible to manage each month if your income targets are met.
and maybe Your money will be better elsewhere.such as in the stock market or tied to other more liquid investments that earn better returns.
Pay size 15 years for a 30 year home loan.
- If you can’t qualify for the higher payments associated with a fixed 15-year home loan.
- Or just don’t want to be locked into a short-term mortgage?
- You can still enjoy the benefits by making voluntary larger monthly payments.
- Just set the amount to repay your loan in half the time. (or nearby)
Even if you’re determined to pay off your mortgage. You can pay in installments for 30 years and Make extra mortgage payments each month.The surplus will be credited to the principal balance.
This flexibility will protect you during times of tight money. and also cause the mortgage to be dropped for many years
have biweekly mortgage payments As well, you might not even notice it leaving your bank account.
It is also possible to use both credit programs at different times in your life.
For example, you might start your mortgage journey with a 30-year loan, then refinance your mortgage for a 15-year period later to keep things in line if your goal is. Own a clear home before retirement age.
In summary, the mortgage is ahemit’s a big deal So make sure you compare many situations and do your research. (and math) before making a decision.
Most consumers don’t waste much time on these mortgage basics. But planning now can mean less headaches and more money in your bank account later.
Advantages of a 30 Year Fixed Mortgage
- Lower monthly payments (cheaper)
- Easier features at a higher purchase price
- ability to buy “More homes” with fewer payments
- Payment can always be made in advance if desired.
- Suitable for those who want to invest their money elsewhere.
Disadvantages of a 30-year fixed mortgage
- higher interest rates
- you pay more interest
- You are very slow to equalize.
- If the price goes down, you may fall underwater quite easily.
- Difficult to refinance with low capital
- You won’t own a home for 30 years!
Advantages of a 15 Year Fixed Mortgage
- lower interest rates
- Much less interest paid during the loan term.
- Build equity houses faster
- Own your home for free and clear it in half the time.
- Suitable for people who are close to retirement and/or investors who are conservative.
Disadvantages of a 15-year fixed mortgage
- Higher payments make it harder to qualify.
- You may not be able to afford much of a home.
- you may become poor house (All your money locked in the house)
- Might get a better bang for your buck elsewhere.
See also: 30 year constant vs ARM