15 vs 30 Year Mortgage: Here Are Some Key Differences

Buying a home is one of the biggest financial decisions you’ll make in your life. Throughout the homebuying process, you’ll likely encounter countless terms and choices that may leave you feeling confused and overwhelmed. One of the biggest choices you’ll have to make relates to the term of your mortgage -- with 15 years and 30 years being the most common options. So here’s what you need to know about the difference between 15-year and 30-year mortgages and how you can choose the right option. 

What is a mortgage term?

A loan term generally relates to how long you have to pay it back. For short-term loans like bridge loans, credit cards, and payday loans, your loan term can range from a year, to a month, to even a week. Mortgage loans, on the other hand, are long-term loans with loan terms that can extend over the period of decades. This is because mortgages typically deal with larger sums of money that will require a longer time period to pay back. Some common term lengths for mortgage loans include 15 years, 25 years, or 30 years. 

Choosing your mortgage term is an important decision with huge financial ramifications -- so here’s what you need to know about two of the most common options -- 15-year and 30-year mortgages -- to make the best possible decision.

What is a 15-year mortgage?

A 15-year mortgage is a home loan that must be repaid within 15 years. This is a fixed-rate mortgage that will maintain the same interest rate throughout the entire life of the loan. While 15 years may seem like a long time, it is substantially shorter than the other common choice of a 30-year mortgage. So why would you choose a shorter term of 15 years? 

Here are some of the pros of choosing a 15-year mortgage term:

• 15-year mortgages typically come with lower interest rates that allow you to save money throughout the life of the loan. 
• 15-year mortgages allow you to build equity in your property more quickly since you’re paying more into the principal rather than to interest. 
• Since you’re able to quickly build equity with this type of mortgage, you’re less likely to be underwater if you have to unexpectedly sell your home not long after closing. 

Here are some of the cons of choosing a 15-year mortgage term:

• 15-year mortgages will come with a higher monthly payment since you’re having to pay off the entire principal of the loan in half the time of a 30-year mortgage. 
• Since you’re on the hook for higher payments, it may become difficult for you to afford them if your financial situation changes as a result of a job loss. 
• Paying more on a monthly basis may make it harder for you to save money for expenses and long-term goals like automobiles or retirement.

What is a 30-year mortgage?

A 30-year mortgage is a home loan that must be repaid within 30 years. This is also a fixed-rate loan that will maintain the same interest rate throughout the entire life of the loan. 30 years is twice as long as a 15-year mortgage, but it’s also extremely popular with 90% of homebuyers choosing this option in 2019 according to Freddie Mac. So why would you want to be on the hook for 30 year’s worth of payments on a single asset? 

Here are some of the pros of choosing a 30-year mortgage:

• 30-year mortgages will come with lower monthly payments since the payments are more spread out over the period of 30 years. 
• Since 30-year mortgages come with lower monthly payments, this is a more affordable and accessible option for individuals without high incomes or cash reserves. 
• 30-year mortgages allow homebuyers to afford more house for their money since the repayment time frame is longer and monthly payments are lower. 
• Buyers with a 30-year mortgage are able to save more money for expenses, long-term goals, and savings accounts thanks to lower monthly payments. 

Here are some of the cons of choosing a 30-year mortgage:

• 30-year mortgages typically come with higher interest rates that will cost you more money throughout the lifetime of the loan. 
• 30-year mortgages prevent you from building equity in your home since many of them are front loaded -- meaning that most if not all of your monthly payments in the beginning of the loan are simply going towards paying off interest rather than paying off the actual principal of the loan. 
• Since you’re unable to pay down the principal of the loan in the beginning, you could end up losing money in the event that you unexpectedly have to sell the home within a few years of purchasing it.

How to choose the best mortgage term for you

When you’re dealing with a loan worth hundreds of thousands of dollars for your dream home, you’re going to want to make the best possible decisions to ensure that it’s a realistic and beneficial investment for your family. Your mortgage term is just one of the decisions you’re going to have to make. And while buying a home can be an overwhelming and stressful process, it doesn’t have to be if you’re armed with the knowledge and information you need to make the right decisions. 

So how can you choose the best mortgage term for your unique financial scenario? While speaking with a lender will be the best way to make this determination, here are some different factors you may want to consider: 

• If interest rates are low, as they are currently, the amount of money that you would save in interest by choosing a 15-year mortgage over a 30-year mortgage would be miniscule. As a result, it may make more sense for you to choose a 30-year mortgage to save money in monthly payments and be able to save for other financial goals. 
• If you have more of a modest income, you may want to choose a 30-year mortgage to be able to afford a more expensive home, lower your monthly payments, and have more financial flexibility as a result. 
• If you are planning to only live in your home for a few years, you may want to choose a 15-year mortgage. This option allows you to quickly start paying into the principal of the loan rather than just paying into the interest -- building equity in the process that will allow you to sell the house for a profit rather than losing money. 
• If you have substantial financial resources, you may want to choose a 15-year mortgage. This option allows you to save money in interest and is worth it if you can swing the higher monthly payments.

How to qualify and apply for a mortgage

Another difference between 15-year and 30-year mortgages relates to qualifications. Since 15-year mortgages come with higher monthly payments, you’ll often need a lower debt-to-income ratio in order to qualify for that higher amount. Furthermore, the interest rate of your mortgage is largely based on your credit score, so if you have a lower credit score and are given a higher interest rate as a result, it may not be worthwhile for you to choose a shorter mortgage term that’s usually designed to save money in interest. Finally, offering a sizable down payment on the home can offset some of these qualification issues and allow you to benefit from either term option. 

When it comes to qualifying and applying for a mortgage of any terms, here are some of the different factors that lenders will take into consideration: 

• Income: While there’s no set amount of income you need to be able to buy a house, your income will generally correlate to the amount you’re approved to borrow for a home. Additionally, lenders are looking for stable income and will generally want to see two years of stable income in order to qualify -- this is especially true if you’re self-employed or a freelancer. 
• Credit score: The credit score that you need to qualify for a mortgage largely depends on what type you’re applying for. For an FHA loan that’s backed by the federal government, you need a credit score above 580. For other loans, you need a credit score above 620. Since your credit score determines your interest rate, you should try to build up your credit score as much as possible before applying and buying in order to save money in the long run. 
• Debt-to-income ratio: Another factor that lenders consider when determining your eligibility for a loan is your debt-to-income ratio. Also known as DTI, this ratio involves adding up all of your sources of income and comparing that to all of your sources of debt. Debt can range from student loan payments, to car payments, to credit card payments. Generally speaking, you’ll want to have a DTI below 43% in order to qualify for most loans but if you can get the percentage down to 36%, you’re going to get better mortgage terms.

Final thoughts on mortgage terms

While the major difference between 15-year and 30-year mortgages relates to the repayment time frame, there’s more to it than that. 30-year mortgages are a more popular option as they are more affordable and accessible for everyday homebuyers. In fact, around 90% of homebuyers choose this option. If you’re still stuck between these two options, you may want to consider speaking with a lender like Vaster Capital in order to get personalized advice and expertise. 

Sources:

1. How Much House Can I Afford? | Freddie Mac
2. 8 Ways to Build Credit Fast | NerdWallet
3. What Is a Debt-to-Income Ratio? | Consumer Finance