Whenever you buy a home in the US, you get a bank loan that has to be paid back either over a period of 15 or 30 years. When it comes to choosing from the two options available, it is always advised to take the 15-year loan if you can easily afford the house you want to buy with a 15-year loan. On the other hand, the interest rates are going to be at least 4% higher, and your prospects for investing will not be that hot either. You should take the 30-year loan plan if the interest rate if very low, or atleast lower than 4%, or if you’re getting a good rate on your investment, 6.5% or higher for instance, and are going to invest the money you save because of the lower monthly payments on the 30 vs. the 15. People should also choose the 30-year option if people are unable to afford the 15-year loan plan, which makes the 30-year loan the best choice. For example, if you refinance a loan amount of $200,000 at a fixed 30-year rate of 4%, you would make 360 monthly payments of $870.41 (before taxes or insurances). Choosing a 15-year fixed rate would bring the payment up to $1,405.34, taxes and insurance excluded.
DIFFERENCES IN MONTHLY PAYMENTS
If you are paying off your home loan under a 15-year mortgage plan, it is reasonable to expect an increase in your monthly home loan payments as compared to the 30-year home loan plan. That said, paying off the mortgage in half the time will not double your mortgage payments.
CHOOSING THE BEST OPTION
One of the major differences of the 15 year and 30 years loans is that the former has a higher monthly payment, but you get to pay a lesser interest rate, while in the latter, you will have a lower monthly payment, but you will be paying a significantly higher amount for your home in the long run.
The final decision though, as with most areas of personal finance, will have to be made considering other factors as well, such as risk tolerance, savings and the person’s own discipline when it comes to spending money and paying out the loan.
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