When trying to determine what mortgage is best, the biggest considerations are time and money. A 30-year mortgage is the usual choice for many homebuyers, but that doesn’t necessarily mean it is the right choice. A 30-year mortgage allows you to make smaller payments over a longer period of time. While a 15-year mortgage creates less interest over time by making larger payments.
Because the monthly payment is fixed, the portion going to pay interest and the portion going to pay principal change over time. In the beginning, because the loan balance is so high, most of the payment is interest. But as the balance gets smaller, the interest share of the payment declines, and the share going to principal increases.
With a 30-year loan, there is more interest because you are paying for 360 months instead of the 180 months required with a 15-year mortgage. With a 15-year mortgage, lenders usually loan money at a lower interest rate because the bank is risking its investment over a shorter period of time. While that is a great incentive, the monthly payments can be too high for some homebuyers.
Many homeowners choose today’s 30-year fixed mortgage rate because the payments are lower, freeing up funds for savings or other financial goals. Others choose the 15-year mortgage to get their home paid off quicker.
There is a middle road available with some lenders: the 20-year mortgage. It is what you might expect, a lower interest rate than a 30-year mortgage and higher than a 15-year mortgage with a monthly payment that falls somewhere in the middle as well.
Another road to consider is getting a 30-year mortgage to have the comfort of an affordable payment and then making additional payments to reduce the principal faster as circumstances will allow. Making a 13th payment each year can take 8 years off of a 30-year mortgage because all of that extra payment is strictly paying off the principal. This extra payment can be paid in a lump sum or add a bit extra onto the principal with each of the monthly mortgage payments.
Talk to your lender to see which fixed term loan is best for you.