15 or 30-year fixed mortgage rates?

15 or 30-year fixed mortgage rates

Most Americans when taking out a mortgage, tend to choose between 15-year mortgages and 30-year mortgages, both with clear pros and cons. However, how do you know which is best for you? 15 or 30-year fixed mortgage rates? Discover all the details next:

The 30-year fixed-rate mortgage

The typical American mortgage. In fact, according to the Mortgage Bankers Association 30-year fixed-rate mortgage accounted for 86% of all purchase applications and more than 2/3 of mortgage applications in 2015.

The most appealing feature of this loan is the fact that monthly payments are lower and you can get a bigger and better house than you could with a short-term loan. However, a bigger house can also lead to more taxes and maintenance, so factor this into your decision.

The 15-year fixed-rate mortgage

Despite how appealing the 30-year fixed-rate mortgage might look, remember that there are other very big fish in the sea. A 15-year fixed-rate mortgage is structurally similar to the 30-year fixed-rate mortgage, the main difference of course is basically the years, but also, they can be much cheaper.

Yes, monthly payments are bigger. However, the time you spend paying back the loan is considerably low, it’s half the time!

15-year fixed-rate mortgage vs 30-year fixed-rate mortgage

Despite not seeming as crucial at first, paying a loan in 15 years rather than in 30 years definitely makes a difference. And quite a big one, no less. We’re actually talking of tens of thousands of dollars, since it’s not only the loan itself, but the mortgage interest rate.

In fact, according to Clark.com, if you borrow 250,000 dollars for a home, the difference between a 30-year fixed-rate mortgage and a 15-year fixed-rate mortgage is $138,892! Imagine having all this money and investing it over 15 years at an interest rate of 7%. You can get up to 400,000 dollars!

Also, because there is a fixed monthly payment and the 30-year-mortgage’s balance shrinks much slower than the 15-year. And it makes sense, since in truth you’re getting the same money and paying it in more than twice the time (the interest rate declines slower than the 15-year mortgage).

In regards to interest rates, 15-year loans are less risky for financial institutions than 30-year mortgages, which means that the interest rate will be cheaper for the latter. You can pay between quarter of a percent to a full percent less for a 15-year mortgage.

Also, government supported agencies tend to charge additional fees or ‘loan level price adjustments’, which make the 30-year fixed mortgage rates even more expensive. Interestingly enough, some of these level price adjustment don’t apply for 15-year mortgages…

And that’s not all. The Federal Housing Administration also charges more mortgage insurance for the longer mortgage loans.

Of course, as we mentioned before, the cost of 15-year mortgages is noticeably steeper, it can even get to be 50% more expensive than the 30-year mortgage, so if you’re planning on choosing the 15-year loan it’s a crucial piece of information to factor into this decision.

With a 30-year fixed-rate mortgage you can build up your savings and use the money you save from the 15-year fixed-rate mortgage for other goals, like investing it in a 529 account for college tuition or a 401(k) plan for your retirement

The 30-year fixed-rate mortgage is a solid option and one that allows some leniency in case money’s tighter at home. However, if you can afford it, the 15-year fixed-rate mortgage is the best way to go.