Choosing the right mortgage term (period of time) is one of the most important decisions to make during the refinance or home purchase process. Below we outline some of the pros and cons of each. While 15-Year Fixed and 30-Year Fixed are far and away the most common terms, clients can often choose anywhere between 8 and 30.
The 15-Year Fixed mortgage typically comes with the lowest interest rates available on the market. Because you are paying off the loan in half the time of a traditional 30-Year Fixed. Typically, a 15-Year that comes with a higher principal and interest payment best fits a client in a strong and stable financial position. If there’s hesitation about making a higher payment for the next 180 months (15 years), a longer-term loan with more flexibility and the option to pay extra is likely a better choice.
Paying off a house 15 years faster can save hundreds of thousands in interest payments over the life of a loan. Let’s walk through some hypothetical situations.
- 30-Year Fixed
- Loan Amount = $250,000
- Interest Rate = 2.99%
- Principal and Interest Payment = $1,052
- Term = 360 Months
(Principal and interest payment) x (total months remaining) = (number of payments made over life of loan)
$1052 x 360 = $378,720
Client A pays $378,720 in total over the life of their 30-Year loan. $378,720 – $250,000 = $128,720 in interest paid over the life of the loan.
- 15-Year Fixed
- Loan Amount = $250,000
- Interest Rate = 2.25%
- Principal and Interest Payment = $1,637
- Term = 180 Months
(Principal and interest payment) X (total months remaining) = (number of payments made over life of loan)
$1637 X 180 = $294,660
Client B pays $294,660 in total over the life of their 15-Year loan. $294,660 – $250,000 = $44,660 in interest paid over the life of the loan. That’s $84,060 less than they would have paid on a 30-Year.
Summary of 15-Year Term
15-Year mortgages are a great fit for the right client. Someone that expects strong and continual income and does not struggle with high-interest rate debt (e.g., credit cards) should strongly consider the life of loan savings a 15-Year can provide.
The 30-Year Fixed mortgage is the most common and traditional loan in America. It allows low-interest rates but with added flexibility with your payment. Most if not all 30-Year fixed mortgages that Agave Home Loans offer carry NO pre-payment penalties. No pre-payment penalties means that you can pay as much extra each month straight towards additional principal. Extra principal payments allow you to pay the home off faster than 30-Years and at the pace you choose. Many clients that can afford a shorter-term loan like a 15-Year still choose the 30-Year so that they can take the savings and invest money elsewhere. Some choose to put their excess monthly budget into an Individual Retirement Account, 401k, investment brokerage account, other real estate investments, or savings funds.
Folks choosing the 30-Year are likely to believe that “cash is king” and enjoy the added monthly savings. Many servicers allow automatic extra payments that ensure the 30-Year automatically pays off in 20-Years. If someone experiences a financial emergency, or they need to loosen the belt around the holidays, a client might turn off their automatic extra payments and fall back on the minimum monthly payment due.
A 30-Year Fixed is also the best fit for anyone trying to tackle credit cards that often carry higher interest rates than mortgages. Adding some monthly savings can allow for extra payments on a car. Tackling a car payoff sooner than expected can create a snowball effect that frees up even more cash to go towards credit cards or other monthly bills.
The difference between 15-Year and 30-Year rates can vary based on a given market. Sometimes the rates are similar, sometime the spread widens. Our experienced Loan Officers are trained to understand your scenario and make recommendations based on what makes the most sense. Simplistic options to choose from allow you and your family to make the best and right decision for your unique scenario. Click “Get Started” below to find out the options available for you!
Summary of 30-Year Term
30-Year mortgages are the perfect loan for anyone looking for maximum flexibility. You can always pay extra to payoff the loan faster and the average person does not stay in the same house without refinancing every 3-5 years. Use flexibility to pay down high-interest debt or put towards other parts of your life. Save for a vacation, college, wedding, or retirement.
Speak with an Agave expert and decide what’s best for you and your family.