15-year vs. 30-year: Which Fixed Rate Should I Get?

Many factors come into consideration when choosing a mortgage plan; these factors form the basis of your decision. The most prominent factors include time, interest rate and most importantly, your budget. The standard mortgage plan in the United States is the 30-year fixed-rate. Recently, the 15-year fixed rate has caught the attraction of many.

The Deciding Factors

The general rule as regards mortgage payment states that your payment should not exceed 20% of your pre-tax monthly income. If you earn $64,000 annually, your monthly income will be $5,416; which means you can afford a mortgage payment of $1400 and also cover principal, interest taxes, and insurance. The monthly budget you set out will help you cover the mortgage loan and eventually make the house your home.

With the 30-year fixed-rate, you will be able to buy a home while paying less on a monthly basis. Mortgage companies grant loans based on the percentage of your income, so if you are trying to meet up with your home buying budget, the 30-year fixed rate is advisable. This rate is a great way to save and work within your budget because the interest rate is well spread over time

Meanwhile, the 15-year fixed-rate is gaining popularity in the United States, and the reason for this is not far-fetched. The benefit of this rate is that you will be able to build your equity at a faster pace and get the debts off your shoulders. With this plan, you will pay off your home twice as fast as you would under a 30-year fixed plan. Let’s say that you secure a loan with the rate of less than 1%, you will be expected to pay within the range of $1390- $1420 per month on a 15 year fixed rate plan for a $200,000 mortgage property. However, if you opt for the 30-year loan for the same property, the amount will range from $800 – $956.

The length of the term of the mortgage determines the interest rate. The 15-year fixed-rate has a lower interest rate because the loan is intended to be paid over a short period of time. However, if you get the 15-year mortgage, your monthly payment will be higher in comparison to the 30-year mortgage for the same property. The 15-year mortgage offers stability, and your monthly payment will not change even in the event of a rise in market price or inflation.  

As mentioned, many factors determine the rate you will go for. Some major determinants are time and money. The 30-year fixed-rate will be a good fit for individuals 40 and below because they have a little more time to be in the labor market. However, individuals 45 and above should consider the 15-year fixed rate because retirement is just around the corner. If you want to have a debt-free life after retirement, the 15-year fixed rate is advisable.

The 30-year Plan

The 30-year mortgage plan gives room to consider other goals or financial commitments you might have. Instead of having to make huge monthly payments every month, you could divert some of the funds towards your other long-term goals like college fees for your kids and other similar expenses.

The 30-year schedule also gives you space for some flexibility. With this plan, you will be able to adjust easily to any unforeseen events. Your financial budget might fluctuate due to the cost of education of your kids, food, clothes, and other family arrangements. Lower monthly payments will enable you to cover the above expenses. 

In addition, if you do not have a stable flow of income, or if you are worried that you will be unable to meet up with your monthly payment, then the 30-year rate will be the best choice. In such a case, the 30 year fixed rate will be advisable due to its lower monthly payment and flexibility.

The 15-year Plan

If you choose the option of the 15-year mortgage schedule, two factors will favor you — first, the lower interest rate, and secondly, lifetime interest costs. The 15-year mortgage poses a lesser risk to lenders; this makes the interest rate a lot less. The longer the time span of the loan, the more interest rate you are likely to pay. If you want to pay less on interest, it is best you subscribe to the 15-year mortgage.

The calculation of the mortgage amortization will benefit you with respect to the amount of interest you accumulate. Due to the amortization, most of your payments will pay off the mortgage company fast with the 15-year mortgage schedule.

If you plan on staying in your home for a short time, say 8 years or below, then a 30-year loan might benefit you more. This is because the lower monthly payments will suit your plan and you won’t have to pay as much interest due to the fact that you plan on selling your home earlier than your loans pay off date. However, if you want to secure a retirement home within a short period of time, then the 15-year based mortgage plan is the right rate to subscribe to. The idea is that you have less time to cover more grounds as regards the payment of your mortgage property.

In the above example, as regards the 200,000-mortgage schedule, the 30-year mortgage plan is a lot more expensive in the long run because the $956 monthly payment will amount to $344,160; this means that the total interest rate will amount to $144,160. However, with the 15 years plan, your monthly payments will be $344,160; this sums up your total interest to $144,160 within 15 years. Getting the 15-year loan will help you save thousands of dollars. You will be paying way less interest  to the mortgage company.

Which One Should You Get?

It is possible to get the best of both worlds (15-year fixed vs. 30 years fixed). In most cases, a borrower might doubt their capability to be able to pay off a 15-year mortgage plan, so they opt for the 30-year mortgage. A borrower is entitled to forward extra payments to the principal so you can easily make larger payments of a 15-year plan in your 30-year fixed mortgage. The idea here is that if you are unable to keep up with the 15-year schedule, you can easily fall back to the lower payment of the 30-year mortgage plan. However, this will only be possible if the mortgage does not have a prepayment penalty.

It is important you go through your mortgage agreements in detail. Pre-payment penalties prevent you from paying in excess to your principal; you will be liable to a fee if you do. Some lenders charge a prepayment fee and others don’t. You should make efforts to clarify this during the loan agreements.  If the agreements allow for early added payment, you should consider paying upfront.

Evaluate your financial strength; this will help you determine which mortgage schedule fits your life plan and long-term goals. However, when evaluating, you should also consider your age and the amount of time you have left before retirement. If you are close to retirement, you should consider the 15-year fixed-rate as this will offload the debt weight on time and ensure you have a debt-free retirement life.