15- vs 30-year Mortgages

February 2, 2018 by Marty Orefice | Financing

Shorter mortgages are less expensive in the long run, but they're harder to qualify for.
The majority of people get 30-year mortgages, but in reality, if you can afford a shorter mortgage term, you are better off getting one for many reasons.

Shorter mortgages often have better interest rates. Additionally, over the course of your mortgage, you pay significantly less money.

An Example

The national median sale price of a home in January 2018 is $335,400. Interest rates for 30-year mortgages are 4.25 percent and interest rates for 15-year fixed mortgages are 3.875 percent.

That means that a person who purchased a median-priced home in January of 2018 with a 30-year fixed mortgage will pay a total of $593,988 for that home.

A person who purchased a median-priced home in January of 2018 with a 15-year fixed mortgage will pay a total of $442,792.

You pay $1,650 per month for a 30-year fixed rate mortgage. You pay $2,460 a month for a 15-year fixed rate mortgage.

Which Should You Choose?

That’s a lot of math. However, these are the key facts.

You pay $810 more per month for a 15-year fixed mortgage than you would for a 30-year fixed mortgage. Overall, a 15-year mortgage is $151,196 cheaper than a 30-year mortgage.

The shorter your mortgage term, the less money you’ll be paying over the course of your mortgage. Clearly, a 15-year fixed mortgage is more logical than a 30-year mortgage. However, you won’t qualify unless you follow the 30-percent rule.

Your income is the key factor that determines which mortgage you should choose.

In this scenario, to qualify for a 15-year fixed rate mortgage, you’ll need to earn at least $88,560 per year for a lender to approve you. That’s three times the mortgage payment on a 15-year mortgage. However, to qualify for a 30-year mortgage, you’ll need to make $59,400 per year, which is three times the mortgage payment on a 30-year mortgage.

Why 30-Year Mortgages Are More Common

It has been a long-standing tradition for people to get 30-year mortgages. Additionally, based on the 30-percent rule that most lenders follow, most of the people in the United States make enough money to qualify. The median income in the United States is $55,322, which isn’t even enough income for the 30-year option. People tend to purchase homes as soon they are financially able to do so. Therefore, they typically don’t hit that higher income bracket when they are first looking to purchase a home.

Nonetheless, it is important to know the advantages of each possible mortgage type so that you can be aware of which option is right for you when you purchase a home.

More so, if you have extra money at the end of each month, you can still take advantage of having a lower overall payment by paying the 15-year mortgage amount or any amount greater than what you’re “supposed” to pay each month. Your interest rate will remain at the 30-year rate; however, you’ll pay off the home sooner and ultimately pay less money in interest than you would have paid over the 30 years.
Assorted Color Wall Paint House Photo by Jessica Bryant is licensed under the Pexels Photo License.

Marty Orefice

About The Author

Marty Orefice

Martin Orefice is a real estate investor who has been in the industry for over a decade. He has experience with rent to own deals from all sides—as a buyer, seller and investor. He created RentToOwnLabs.com to provide the #1 resource where people can find information about all things rent to own.

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