There’s a lot to decide when figuring out how to finance a new home purchase, not the least of which is whether to opt for a 30 year or 15 year fixed rate mortgage. While there are advantages to a 15 year fixed of having a lower interest rate, the 30 year fixed option will lead to great flexibility in cash flow. Below are some helpful tips to individuals on the fence between the 30 year or 15 year fixed home loan options.
Can you handle a mortgage that must be paid off in 15 years?
A shorter term mortgage comes with a lower rate but also comes with higher monthly payments as the balance must be paid off in a shorter time period. If the borrower can afford the higher payments associated with a 15-year loan they should take it. However, it’s important to be honest with yourself as if you cannot keep up with the payments it will lead to delinquency, which comes with a steep set of consequences.
30 year or 15 year Fixed Rate – Save more or Pay more
As a borrower, if this is the first home you’re buying then the 30-year fixed-rate mortgage may be more attractive as it is great for those starting out on a bit of a tighter budget and offers more leniency in terms of the time frame for paying the loan back. If there’s any doubt on the ability to make the 15 year payment each and every month, you can always opt for the 30 year fixed while making the equivalent 15 year mortgage payment as a principal reduction. Usually the difference in interest will lead to the loan being paid off in just under 16 years instead of 15 years. The flexibility in this strategy, can provide a lot of comfort when buying a home.
On the other side of the coin, if you’re a seasoned home buyer and are planning on retiring soon then a shorter term mortgage might be more viable as you do not want to worry about paying off that loan well into your golden years.
And perhaps most important, you’ll have to put forth a strict budget and savings plan to account for your mortgage payments. Maintaining a strong credit score and responsible payment activity for all your bills is paramount, but the mortgage is arguably the most significant and important bill you will ever have to pay.