Over the past few years there have been a growing number of loan programs to enter the market. Instead of wholesale changes to guidelines, we are seeing the growth of unique feature lenders that offer very specific loan terms. Nowadays, if you want a 22-year mortgage lenders can make that happen. This is a niche feature that some buyers find appealing, but a majority of new home buyers still opt for one of two traditional term options: 30 or 15 years fixed. Each of these options brings something different to the table and has their own distinct benefit. Choosing the right loan term should be the starting point for your mortgage and will impact your finances for years to come. Here are three benefits for both a 30 & 15-year fixed mortgage.
30 Year Fixed
Reduced Payment. The longer you stretch your loan term out the lower the monthly payments will be. Affordability is always one of the primary considerations with any purchase. You may not think of where you will be thirty years from now, but you will think of the monthly payments. With your lower payment you may be able to get into the house you desire without stretching your budget.
Principle Reduction. Even though you have a 30-year term it doesn’t necessarily mean you will pay for 360 months. Every mortgage you take gives you the option of adding additional principal to your payment. With a 30-year loan if you make one extra principal payment a year you can knock your loan down to 22 years. This is a great thing because it gives you the option of keeping your 30-year payment and paying more to lower the loan down when you have surplus capital.
Easier Qualification. One of the three main pillars of loan approval is something called your debt to income ratio. Just as it sounds, the lender evaluates your monthly debt into your monthly income and comes up with a number. If that number is over a certain threshold you may not be able to qualify, regardless of down payment or credit score. With a 30-year loan your payment is much lower than a 15-year loan, giving you a better chance at qualification.
15 Year Fixed
Quicker Path to Ownership. The goal of most homeowners is to own their property as quickly as possible. Most don’t consider how long 30 years from now may actually be. With a 15-year loan you greatly reduce the number of years you are on the hook for the loan. And, once you own your property outright, the only housing payments you will make are for the taxes and the insurance. This boosts your overall cash flow and helps keep some money in your pocket every month.
Lower Rate/Lower Interest Payments. Even though you have a lower rate with a 15-year mortgage your monthly payments will be higher. This is because you are shrinking the number of payments in half. But, with a 30-year loan you literally pay hundreds of thousands of dollars in interest. Just look at your amortization schedule and you will be shocked at just how much interest you pay. With a 15-year loan you pay more principal every month. As you will see, this greatly accelerates your loan payoff, so even though you are paying more right now, you get it out of the way faster and get to completely own the property quicker.
Build Equity Faster. Since a bulk of your payment is going towards the principal, you are able to knock down more of the balance every month with a 15 year plan. Even if you don’t necessarily plan to live in the house for 15 years you will have increased options after year 5 in terms of what you plan to do next with your property. Your balance owed will be lower allowing you to sell for a profit, refinance, pull cash out, or add a home equity line of credit.
There are pros and cons with any mortgage you take. You must always know exactly what you are getting into before deciding on anything. Make sure to ask your loan officer or mortgage broker for all possible loan term options prior to locking your loan. The right loan term for you can allow you to enjoy your home for years to come.