While buying a home, especially for first-time home buyers, you are always presented with two standard options for mortgage plans. The first is a 15-year mortgage plan, and the second is a 30-year mortgage. Just as the names imply, the mortgage plans have a duration of 15 years and 30 years respectively to pay off with a fixed monthly payment and interest rate. Here, we take a look at these two mortgage plans to assist you in making the correct call for your future.
30-YEAR MORTGAGE – This is the most obvious benefit of the 30-year mortgage plan because it helps the not-so-rich individuals with a more affordable monthly payment. Here, your loan is stretched across the entirety of the loan period, so you have a low monthly income to pay.
15-YEAR MORTGAGE – In comparison to the 30-year mortgage, the monthly payment is quite high because you must pay the amount that was supposed to be stretched for 30 years in half the time. This could be a reason to avoid the 15-year mortgage.
30-YEAR MORTGAGE – Because the loan period is 30 years which is a long time, the risk is higher, and that subsequently increases the interest rate on your loan. This means you have to pay more interest than someone that chooses a 15-year mortgage plan.
15-YEAR MORTGAGE – The 15-year mortgage plan comes with less risk than the 30-year one. Hence, it carries a lower interest rate. The difference in interest rate between a 15-year mortgage and a 30-year mortgage could be between 0.5% and 0.75% per annum, depending on the lender.
Overall Mortgage Cost
30-YEAR MORTGAGE – On a 30-year mortgage plan, you have to pay a higher interest for a longer period in addition to your principal loan. When you put all these together, you realize that you pay a higher mortgage cost than someone on a 15-year mortgage.
15-YEAR MORTGAGE – Here, although your monthly payment is higher than what you would have paid on the 30-year mortgage, you will pay lower interest for a shorter time here. This means you have a shorter amount of time to accumulate equity and be completely free of debt.
A Narrative Example
Suppose Mr. A and Mr. B went to the same lender to take out a $240,000 loan to finance a mortgage to buy a home, with Mr. A using the 30-year mortgage plan and Mr. B using the 15-year mortgage plan. If Mr. A's interest rate is 4%, then Mr. B's interest rate is 3.5% because of the significant difference in their payment period. Mr. A's monthly payment will be $1,146, and Mr. B's monthly payment will be $1,716. The total amount of interest paid by Mr. A will be $172,000, while the total interest paid by Mr. B will be $69,000. At the end of their loan period, the total mortgage cost to have been paid by Mr. A will be $412,000, while the total mortgage cost for Mr. B will be $309,000.
To choose the mortgage that best suits your financial condition, you must put some factors into consideration, factors like; how much is your monthly income, how much is your total monthly expenditure, what do you expect to achieve in the nearby future, and some other questions to determine your financial situation. The 15-year mortgage plan has more benefits than the 30-year mortgage plan, but you should choose the plan that best works for you.
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