Whether you're buying a home or trying to save money on your monthly payments by refinancing, trying to assess all of your mortgage options can be challenging. Even if you decide that the uncertainty of an adjustable rate mortgage isn't for you, fixed mortgages still offer different terms, with the two most common being 15 years and 30 years. Interest rates can differ dramatically, and tax consequences from deducting mortgage interest can make it even harder to do an apples-to-apples comparison of your mortgage options. However, this mortgage calculator will produce a side-by-side look at how different mortgages compare, helping you make a smarter decision. Let's take a closer look at the calculator and how it works.
* Calculator is for estimation purposes only, and is not financial planning or advice. As with any tool, it is only as accurate as the assumptions it makes and the data it has, and should not be relied on as a substitute for a financial advisor or a tax professional.
The big trade-off between 15-year and 30-year mortgages
Each type of fixed mortgage has pros and cons. The most popular mortgage term is 30 years, and it generally features much lower monthly payments than 15-year mortgages. That means that you can afford to buy a more expensive home if you take out a 30-year mortgage than if you choose a home loan with a 15-year term.
However, interest rates are typically lower on 15-year mortgages than they are on 30-year loans. Combined with the fact that you pay off a 15-year loan twice as fast, and it's easy to understand why some cost-conscious homebuyers opt for the shortest terms possible. However, another thing to take into account is whether you could have put better use to your money if you had chosen to take a longer-term loan and invested the difference.
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A simple mortgage example
To see how this works, say that you want to borrow $200,000 toward buying a home. At the time you're looking, 15-year mortgage rates are at 3%, while 30-year rates will cost you 4%. Under that assumption, a 15-year mortgage will produce a monthly payment of almost $1,400, while the 30-year loan has payments of $964 per month.
If you don't take into account the potential investment returns of not paying back your mortgage as quickly, then the 15-year mortgage has a clear edge. It costs you more cash during the first 15 years, but after that, you get to live in your home mortgage-free and take the payments you otherwise would have made and put them to use elsewhere. By contrast, the 30-year mortgage charges you the smaller amount for twice as long, leading to a total discounted outlay that's more than $100,000 higher than for the 15-year.
However, the results of the analysis change if you assume that you would invest the difference aggressively in a high-return investment like the stock market. Using the same assumptions as above, instead consider a situation in which the homeowner can invest any savings and earn an average annual return of 10%. In that case, the 30-year loan has the advantage of smaller monthly payments that are more than $400 per month less than the 15-year. Investing that produces enough positive return to turn the tide and give the 30-year mortgage the win by $37,500 over the 15-year mortgage.
Pay what you can
Many homeowners add in non-financial considerations when they think about the term of the mortgage to choose. For many, getting a mortgage paid off as quickly as possible has psychological benefits that can inform their decisions even if the numbers tell a different story. At the same time, others prefer to have the flexibility that a 30-year mortgage offers even if they can afford the higher payments on a 15-year mortgage. And of course, some people simply can't afford to buy a home with a 15-year mortgage in the real estate markets in which they live, making the 30-year the only viable option.
Knowing the pros and cons behind different mortgage terms is important. The choice you make can save you thousands of dollars over the course of your mortgage, making it that much easier to live comfortably in the home of your dreams.
