15-year or 30-year mortgage?

Weigh the benefits of each to make an informed decision

 

Shopping for a mortgage? One of Alpine Bank’s experienced mortgage lenders can discuss whether a 15-year fixed mortgage or 30-year fixed mortgage would be a better fit for you. The 15-year fixed comes with some wonderful benefits including a lower interest rate, less interest expense, and a pay-off date that will be enjoyed much sooner than on a 30-year mortgage. The 15-year fixed mortgage also comes with some risks that are worth contemplating. The most important of these includes a much larger minimum monthly payment that offers customers less flexibility in the case of financial hardship. 

The 30-year fixed mortgage also comes with some great benefits, including a much lower minimum monthly payment that makes it easier for many customers to qualify. But do the benefits of the 30-year fixed mortgage outweigh those of the 15-year? Well, the truth is that this decision doesn’t have a right or wrong answer. It’s something that each homeowner needs to consider individually to make the right decision. A qualified local mortgage lender is an essential part of the process as they can assist in providing numbers to help in analyzing options, as well as perspectives that may not have been considered. 

Here are some data points to consider:

Amortization Loan Amount Interest Rate P&I Payment Interest Paid Paid Off
15 years $ 550,000.00  4.625% $   4,243.00  $ 213,740.00  Sep-37
30 years $ 550,000.00  5.375% $   3,080.00  $ 558,800.00  Sep-52

 

The chart above demonstrates the interest savings associated with the 15-year mortgage option. In this case, the customer would save $345,060 in interest expense by choosing the 15-year option. However, the payment on the 15-year mortgage is also $1,163 per month higher. 

That’s a significant increase in the monthly financial obligation and may make it worth considering the flexibility of a 30-year mortgage — just in case financial difficulties arise. An often-overlooked option would be to blend the benefits of the 15-year and 30-year mortgages into one. But how would this be accomplished? 

Let’s start by exploring the numbers. The minimum monthly payment on the 30-year option listed above is $3,080 per month, but there’s no reason a customer can’t make monthly payment that are larger than the minimum. For example, let’s say a customer chose the 30-year fixed option, but then started making large enough payment that the loan would be paid off in 15 years. What would that look like financially? Let’s explore via the chart below. 

Amortization Loan Amount Interest Rate P&I Payment Interest Paid Paid Off
15 years $ 550,000.00  4.625% $   4,243.00  $ 213,740.00  Sep-37
30 years $ 550,000.00  5.375% $   3,080.00  $ 558,800.00  Sep-52
30 years – pd in 15 years $ 550,000.00  5.375% $   4,457.56  $ 252,360.80  Sep-37

 

In this case, the customer has chosen to go with a 30-year fixed mortgage that provides them with a lower minimum payment just in case they run into financial difficulties in the future. However, they have chosen to pay the loan off in 15 years by making larger payments each month, which reaps them some of the same benefits the 15-year fixed mortgage. They’ll save $306,439 in their total interest paid over the life of the loan, and they’ll pay off the loan in just 15 years. 

The right mortgage structure can have a lasting impact on long-term financial health, as our discussion above illustrates. What may be right for one person could very well be the wrong decision for another. It’s another reason why it’s so important to work with a highly qualified and trusted mortgage lender when deciding on a property purchase. Your local Alpine Bank mortgage lender is happy to discuss your needs and goals with you when you’re purchasing a home or seeking a refinance.

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