Whether you are buying a home or you are refinancing, one of the important decisions you will have to make is your loan term. For most borrowers, a fixed-rate loan is the best option as these loans are not subject to higher monthly payments. Once you agree to accept a fixed-rate loan, the only changes in monthly payments would occur if your property taxes or insurance costs increased. However, borrowers must also make a decision between a 15 year fixed and 30 year fixed loan.
Deciding between 15 and 30 year mortgage home loan amortizations
Why the local mortgage rates vary
In most cases, the interest rate on a 15 year fixed rate mortgage can be as much as one half a percentage point lower than a 30 year fixed rate mortgage. This is because the lender is taking far less risk with a 15 year mortgage than with a 30 year mortgage. For the borrower however, a 15 year fixed rate mortgage will also mean higher monthly payments. There may be some valid reasons for signing a 30 year mortgage versus a 15 year mortgage.
The benefits of a 30 year fixed mortgage rate
Most lenders do not include a prepayment penalty with a 30 year fixed rate mortgage. This allows the homeowner to “pay down” the principal amount of their loans in less time than the overall length of the note. As an example, let’s take a look at a purchase loan where you have put a 20 percent down payment and you are financing $165,000. The following is an estimate of how a 15 year and a 30 year mortgage compare to each other.
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30 Year Fixed |
15 Year Fixed |
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Loan Amount: $165,000 |
Loan Amount: $165,000 |
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Fixed Rate: 4% |
Fixed Rate: 3.5% |
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APR: 4.06 Points: 0 |
APR: 3.56 Points: 0 |
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Monthly payment: $787* |
Monthly payment: $1,179* |
As you can see, the 15 year fixed mortgage payment is $392 higher than the 15 year rate. However, since a 30 year mortgage does not typically carry a pre-payment penalty, a homeowner may elect to pay this extra amount every month. By paying extra principal every month, a homeowner can reduce the term of their loan as well as the amount of interest paid.
Advantages of a 30 versus 15 year mortgage loan amortization
Accepting a 30 year fixed rate mortgage keeps your payments lower in the event that you suffer from any loss of income. Provided your loan does not have a prepayment clause, you can elect to make “extra” payments to shorten the length of your loan. A sudden medical issue or loss of employment may make a 15 year mortgage harder to maintain making a 30 year fixed rate loan a better deal for most homeowners.
* Notes: The payments do not include taxes and insurance and are based on a credit rating of 720. This is for information purposes only and not to be construed as an actual offer to lend this amount at this rate. Rates shown are for display purposes only. Call our office for up to date rate and program information. NMLS #1743702
