- 07 Sep, 2023
Should you opt for a 15-year or a 30-year mortgage in 2023?
3 tips to resolve the 15 vs 30 year mortgage dilemma
Becoming a homeowner without a mortgage is nearly impossible with the rise in prices in the real estate industry. There are different options available for individuals who are yearning to purchase a home. From first time home buyer mortgages to second mortgage programs, the options are plenty in the American home insurance market.
However, the dilemma kicks in when there are tons of options provided to home buyers! One such common confusion that is aroused in the minds of home buyers is whether they should opt for a 15-year or a 30-year mortgage in 2023. Making this decision is as important as naming a baby or choosing a master's program of your choice!
“The light is what guides you home, the warmth is what keeps you there.”
- Ellie Rodriguez
This is because the decision you make highly reflects on your other lifestyle choices on a day-to-day basis. Choosing between a 15-year or a 30-year mortgage affects your ability to meet any other life expenses because of higher/lower interest rates, and the overall costs involved change while securing a mortgage based on your decision. This decision holds a significant weight on your financial stability and long-term goals.
In this blog, we will help you choose the right mortgage terms by understanding the pros and cons of both options, factors to consider before selecting a mortgage term, 4 easy ways to make an informed decision, and all you need to know about a 15-year fixed rate mortgage.
What is a mortgage term?
Before understanding the differences and the pros of a 15 vs. 30 year mortgage, let’s learn what a mortgage term is all about. In simple terms, a mortgage term is the period of time over which you agree to repay your mortgage. The term you choose acts like a timetable during your homeownership journey where you pay off your mortgage in an agreed term and finish your mortgage.
What distinguishes the 15-year vs. the 30-year mortgage is the numbers. Yes, you guessed it right, a 15-year mortgage requires you to pay off your loan in 15 years whereas a 30-year mortgage requires you to pay off your loan in 30 years, allowing a far more extended period, unlike the 15-year mortgage option.
But. that’s just not it! There is more to these two mortgage options which we will discuss in the coming sections.
The 15-year Mortgage - Pros and cons
If you’re someone who wants to save a significant amount of money in the long run, a 15-year mortgage is the right choice for you as the interest rates and monthly payments do not change until the end of the mortgage.
But, payments can be higher in the 15-year mortgage option which leaves most homeowners defaulting on the mortgage due to their inability to pay off the mortgage successfully. Now, jumping to the pros and cons of the 15-year mortgage.
| Pros | Cons |
|---|---|
| If you’re looking to make it to homeownership faster, then paying off your mortgage quickly becomes essential. | This mortgage option comes with its own set of challenges, i.e. the higher monthly payments. |
| With a 15-year mortgage, you can accumulate home equity faster. | As you are paying off your mortgage in half the time, your monthly installments are higher than the 30-year mortgage option. |
| Every monthly payment helps build a substantial amount of equity and helps you own a significant portion of your home much quicker than a 30-year mortgage. | This can take a spin on your monthly budget and make it difficult to meet other monthly expenses. |
| A 15-year mortgage comes with lower interest rates, compared to a 30-year mortgage. | As you are committed to paying higher monthly installments, there is limited flexibility and you might find it challenging to meet any unexpected expenses. |
| Lesser interest payments mean less money spent over the life of your loan. | The extra money that is being used to pay these higher monthly installments could be used as an investment to secure your or your children’s future. |
| Even if you start your homeownership journey with a mortgage debt, you get to pay it off faster and get rid of the debt on your back. | |
| In 15 years you will be debt-free and a proud homeowner. |
The 30-year Mortgage - Pros and cons
A 30-year mortgage is said to be a flexible and budget-friendly option for those who are willing to manage their monthly expenses while successfully paying toward the mortgage. Come let’s look into their pros and cons!
| Pros | Cons |
|---|---|
| The most attractive feature of this type of mortgage is its lower monthly payments. | Compared to a 15-year mortgage, the equity on your home will be accumulated in slow motion. |
| You get to spread your monthly payments over the span of 30 years and manage any other unexpected expenses with ease. | With this option, you cannot quickly tap into your home equity and use it for other improvement reasons. |
| These lower monthly payments enable you to be financially flexible and allow you to free up funds for other investment options or even save for retirement. | You end up paying a higher interest rate due to the longer duration of the loan, although the monthly payments are lower. This indirectly increases the total cost of your home. |
| With the extra cash, you can allocate your income towards stock investments, purchase any other additional properties, or start a business. | While choosing a 30-year mortgage seems to be an affordable option, it represents a more extended debt commitment. |
15 vs. 30 year - 4 factors to consider in 2023
When you are in a dilemma to choose between these two options, these factors come handy to ensure that you make the right choice.
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Current financial strength
Your current earnings, expenses, and past credit history stand to be one of the major deciding factors. If you have a stable income and are successful in making timely higher payments, you can go for a 15-year mortgage. If you prefer the flexibility of lower mortgage payments and can wait for a longer time to tap into home equity, a 30-year mortgage could be a good option.
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Short-term vs. Long-term financial goals
After considering your long-term and short-term financial goals, you will get to choose with improved clarity. If you are someone who is looking to pay off your mortgage quickly and own your home or you want to make room for other investments and be okay with a long-term commitment, you ask yourself and choose the one that you are comfortable with.
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Risk-tolerance and investment strategies
The level of your risk tolerance plays a vital role during the decision-making process. If you’re not a risk taker, it is advisable to go for a 15-year mortgage’s lower interest rate. Whereas if you’re a risk-tolerant individual, you can earn higher returns with a 30-year mortgage as you will be making lower monthly payments while making other investment choices as well.
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Market conditions and interest rates
Always keep a note of current market conditions and interest rates as mortgage rates keep fluctuating based on financial and economic factors. This impacts the overall cost of your chosen mortgage term.
Let’s now see what the data reports!
The 30-year fixed-rate mortgage averaged 7.08 percent as of September 5, 2023, increased from last month when it averaged 6.96 percent. A year ago at this time, the 30-year FRM averaged 5.23 percent.
The 15-year fixed-rate mortgage averaged 6.45 percent, down from last week when it averaged 6.30 percent. A year ago at this time, the 15-year FRM averaged 4.38 percent.
15-year fixed rate mortgage - What’s the buzz all about?
As the term suggests, it is a home loan with a fixed interest rate for the entire period of 15 years. Why are we discussing this particular mortgage term as a spotlight in this section? It is because it is an attractive option for most American homeowners.
Here are two reasons why:
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Fixed interest rate
The term “Fixed” means that your interest rates don’t keep changing year after year, they remain the same throughout your entire 15-year mortgage term. This ensures stability and allows you to predict your payouts, managing finances with confidence.
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Shorter loan term
You can pay off your mortgage over the course of 15 years and reap the benefits of the equity you have built in your home during the span of 15 years, making it a distinctive choice.
However, in order to manage a 15-year fixed rate mortgage, you are required to assess your financial strength and your ability to meet higher monthly repayments without defaulting on the mortgage due to unexpected financial circumstances.
3 tips to help you make an informed decision
Here are some realistic factors to consider if you would like to make a sound decision in choosing a mortgage term.
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Assess your financial health
Check your past transactions and financial history to make sure that you have a stable income and sufficient emergency funds to meet unexpected expenses while making payments for your 15-year or 30-year mortgage.
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Set achievable financial goals
Determine your homeownership goals, while assessing your financial health. Decide if you can primarily focus only on paying off your mortgage or any other investment opportunities that you’re aiming to achieve. With this in mind, make sure to choose a flexible option.
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Stay informed
Keep an email notification for regular updates regarding mortgage news and market rates. If you notice any changes in the market conditions, you can decide accordingly and choose what is best for you in that particular situation.
The ever-evolving market conditions in 2023 make it challenging to choose the right option as it differs based on individual circumstances. There is no perfect answer if you should opt for a 15-year or a 30-year mortgage as the vision of homeownership differs from person to person. The intensity of commitment by an individual plays an important role in choosing what suits the best.
Our aim is to offer you all the necessary information in various sections of the blog so that you can make a confident decision in 2023. We wish you all the best for your homeownership journey!
