When it comes to owning a home, the decision to choose a 15-year or 30-year mortgage has a big impact on your long-term financial health. While both can be beneficial in different ways, there are advantages and disadvantages to consider. Ultimately, it’s important to do the math and decide what makes the most sense for you.
The biggest advantage of a 15-year mortgage is that it comes with lower interest rates. The average rate for a 15-year mortgage is currently around 3%, while the average rate for a 30-year mortgage is closer to 4%. This means that if you have the same loan amount on both mortgages, you can save thousands of dollars over the life of your loan by choosing the 15-year option. For example, if you have a $200,000 loan amount with an interest rate of 3%, your total amount paid over 15 years will be $262,000. With an interest rate of 4%, that same loan amount would cost you $308,000 over 30 years. That’s a difference of nearly $50,000!
Another advantage of choosing a 15-year mortgage is that it allows you to pay off your loan faster. You’ll build equity in your home quicker and become debt free sooner than if you choose the 30-year option. This means more money in your pocket each month and more financial freedom down the line.
On top of all this, opting for a 15-year mortgage also helps you build better credit faster than with its longer term counterpart. Making timely payments on any kind of loan helps improve your credit score over time – but when it comes to mortgages specifically, choosing a shorter term will result in more points added to your score sooner due to its greater emphasis on repayment history rather than credit utilization (the ratio between how much credit you have available and how much credit you’re using).
Of course, there are some drawbacks as well – namely higher monthly payments with less flexibility compared to longer term loans. If your budget is tight or if there’s an emergency expense that needs attention right away, having fewer options could be an issue. Additionally, some people may find themselves unable to take full advantage of tax deductions due to lower total interest payments with shorter term loans (interest paid on mortgages up to $750K can be deducted from federal taxes).
Ultimately though – if saving money long term while becoming debt free quickly is the goal – then considering the advantages of a 15 year vs 30 year mortgage could be worth it in the end!