15 or 30? Find the Right Mortgage Term for You

15 or 30? Find the Right Mortgage Term for You

Potential homebuyers think a lot about numbers when it comes to purchasing their first or a new residence. How many bedrooms and bathrooms, desired square footage, total home price they can afford and interest rate are all numbers that buyers consider before setting out to find a house that meets all or most of their criteria.

Unfortunately, there is one number that can be overlooked in the home-buying process, and it could have an impact on your financial outlook in the years to come. We’re talking about the number associated with your mortgage term, and whether you should opt for that 15-year loan or the more standard 30-year plan.

Understanding Mortgage Terms

Simply put, a mortgage term refers to how long it will take to repay the money you borrow to purchase a home. The most common terms are 15- or 30-year loans, and the length of your mortgage commitment can determine how much you pay in total for your house.

Let’s look at it this way: if you finance a home purchase of $300,000 at an interest rate of 4 percent, you’ll pay $399,431 over the course of a 15-year loan term, according to CalcuNation’s total mortgage calculator.

On the other hand, if you finance that same home with the same interest rate for a 30-year term, you can expect to pay upwards of $515,000 over the life of your mortgage loan.

Initially, it might sound like your best option is to choose the 15-year loan. After all, most financial advisors would tell us that paying less for something is always the best option, but here’s the rub:

First, you probably won’t find a 30-year mortgage that offers the same interest rate as one with a 15-year term, so you can’t compare apples to apples when evaluating mortgage rates. Most interest rates will be higher for the 30-year loan.

Second, even though a 30-year term may have a higher interest rate, your monthly payment will be lower than one associated with a 15-year term.  On average,  the monthly payment on a 15-year mortgage works out to be 1.5 times higher when compared to the 30-year term. In other words, you will pay the loan down more quickly, but the payment schedule is more aggressive, and it will have an impact on your monthly budget.

If you’re stretching the limits of your budget to purchase a home, the 15-year option may not be right for you, as you may be unable to finance a home in your desired price range with the shorter term for repayment. Stretching your budget to fit the parameters of a 15-year term could also have enduring consequences, particularly if it means you are unable to put money into a rainy-day fund or save for other purposes, such as retirement or a child’s education.

Finding the Mortgage Term that Is Right for You

Since 65 percent of homebuyers say they paid the maximum price they could afford for a home, getting into to the house you want may come down to the term of your mortgage. This is where finding the right loan officer becomes really important.

Your mortgage loan officer has the expertise to consider a variety of factors when processing your loan application, such as your credit history and how much you are paying for other expenses as compared to your income, and your loan officer’s guidance won’t stop there!  

A good loan officer wants to see you realize all of the benefits of home ownership, while still enjoying other aspects of your life. Before advising you on loan terms, he or she will discuss your future plans, such as how long you plan to be in your home, when you hope to retire and your other long- and short-term financial goals.

Maybe you’re saving to fund college expenses for your children or want to take an international vacation. Your loan officer should consider factors such as these when determining how much you can and should pay for a home.

In the end, your loan officer should recommend the loan term that is most likely to support not only your present financial situation but also your future outlook. To find a compatible loan officer, talk to friends and family for recommendations and don’t be afraid to interview potential candidates before making a decision.

With the right loan officer by your side throughout the mortgage journey, you can draw from their experience, simplify the process and have greater assurance that the loan term and product you select will be right for you.