When purchasing a house, a vast majority of buyers opt for a 30-year mortgage term, yet some buyers should absolutely consider a 15-year term. The term of your mortgage will impact your monthly payments, interest rate, and long-term financial comfort and stability. We recommend considering the following when selecting your loan term.
For some, it may be difficult or impossible to qualify for a 15-year mortgage payment. Since a 15-year term will almost certainly come with a higher payment, the first question in this conversation should always be, “Can I qualify for a 15-year term?”
Monthly Affordability and Financial Stability
Assess your own monthly budget to ensure you can comfortably manage the higher monthly payment. While underwriting will only count certain debts and liabilities when calculating your debt-to-income ratio and determining if you will qualify for a 15-year mortgage term, you may have additional obligations that aren’t considered by underwriting (such as tuition for your kids in college or private school).
We also recommend that you consider whether your income is stable and predictable each month or if it fluctuates. If a substantial component of your income is a significant end-of-year bonus, it may be easier to manage the 30-year payment month to month, and make additional principal payments when you receive your bonus at the end of each year.
Or if you are paid commission, not salary, and experience some months that are better than others, it may be smart to select a more manageable 30-year payment that’s comfortable to pay even in the lean months and pay additional principal in the more prolific months.
Of course, part of that consideration must also be your savings/reserves. Those buyers who have substantial savings to comfortably carry them until their bonus is paid out each year may not be dissuaded from choosing a 15-year mortgage.
Interest Paid vs. Investment Opportunity
With a 15-year mortgage, you’ll generally pay less interest than with a 30-year mortgage because the loan is paid off faster (and often at a lower interest rate). Opting for a 15-year loan is a favorable choice to minimize the total interest paid over the loan term.
However, if you can invest the money saved from lower monthly payments on a 30-year home loan and earn higher returns, the long-term interest savings may be less exciting. Those who are savvy investors will frequently seek out better investments with the free cash made available by a 30-year mortgage term.
Some investors also find that the tax benefit of mortgage interest over a 30-year term deepens their resolve to invest the money rather than aggressively pay off their home loan.
If you aim to pay off your residence faster and be debt-free sooner, a 15-year mortgage is a good choice. It helps you build equity quickly and own your home outright in half the time. A 30-year loan term is more suitable if you want lower monthly payments and greater financial flexibility.
Are you struggling to decide between a 15-year and 30-year mortgage for your dream home? Let the experts at Harborside Home Loans help you make the right choice. Our team specializes in finding optimal financing terms tailored to your needs. Don’t let uncertainty hold you back – contact us today and let us guide you toward the perfect mortgage solution.