When most think of home loans, they automatically think of a 30-year mortgage. And this option makes a lot of sense for a number of people, especially if they want to save money on their month-to-month payments. But a 30-year loan is not the only option available to potential homebuyers. 15-year loans are an alternative option. But how can you decide which option is right for you and your circumstances? Let us discuss the two.
There are benefits and downsides to both loan options. Most people choose a 30-year mortgage because it allows them to save money on a month-to-month basis. Saving money is definitely a plus! The downside? The interest. Over the life of your loan, you will pay thousands more than you would with a 15-year mortgage.
For an example, let's look at some numbers.
So, the first consideration is determining how much you can afford monthly. Say you get a loan for $300,000. With a 30-year mortgage you would have a payment of $1,400. For that same loan amount but with a 15-year loan amount instead, your monthly payment would come out to be about $2,100. That can be a significant difference for some.
The next big consideration is the interest you will end up paying over the lifetime of your loan. Still using our example of a $300,000 loan, let’s say that you can get an interest rate of 4%. Over 30 years, you would end up paying $215,500 in interest alone. On the other hand, banks see 15 year loans as less risky options because of their shortened lifespan. For this reason, they are likely to give you a better interest rate. So, let’s say that you can lock in a 3.25% interest rate with this option. Over the course of 15 years, you would end up paying $79,000 in interest. Also, a pretty significant difference.
The bottom line is that mortgages are very personal choices. Choosing the best one will depend on you and your finances and your family's needs. If you can part with more money each month to put towards your mortgage, a 15-year loan may appeal to you. If you would rather allocate those funds towards an emergency fund, a 30-year might be best. By far a 30-year mortgage is the most popular route, especially for first time homebuyers. But it is always good to know and consider all the options you have available to you.
Talk to a lender that you trust and discuss the numbers with them as well. And once you are pre-approved, reach out to Ryan DiCharry. We like to give families options too. You will be sure to love your custom built home.