Mortgage – a topic in finance which has given rise to many debates, discussions, and arguments. One of the hottest topics of discussion when it comes to mortgage is which is a better option – 30-year mortgage or 15-year mortgage? Both have their own list of pros and cons which makes it very difficult to come to a straightforward conclusion. The answer comes from what the best thing for you is. While some people prefer the interest savings they make on a 15 year mortgage, others like how they pay less every month in a 30 year mortgage. To decide which one is better for you, you will have to analyze your income, lifestyle, and many other factors.
Tip: You can cash in your annuity or your structured settlement to help with your down payment or paying down the mortgage.
This post will help you determine which mortgage you should go for and which will be more suitable for your lifestyle.
30 year mortgage
A 30 year mortgage payment will be spread across a period of 30 years at a higher interest rate than a 15 year mortgage. However, even though you incur more interest costs, you get a lot of financial stability and flexibility. Here is a list of advantages and disadvantages of a 30 year mortgage plan so you have a clearer idea of the plan.
- Lower monthly payment – the best part about a 30 year mortgage is how you have to pay much lesser money on a monthly basis. It takes off great stress from one’s life and makes it easier to manage things since you can save money for other investments.
- Extra cash for other things – when you spend less on your mortgage, you have more to spend on yourself. You can use the remaining money to plan trips, take your kids out, buy new stuff etc. The kind of financial flexibility you get with this scheme is comfortable. You can also use the cash to increase your personal savings which can support you in future.
- You pay more interest money – the money that goes towards interest is much higher because you pay at a higher rate for twice the time you do in a 15 year mortgage. The money can be a scarily high amount even if you don’t notice it because of the smaller monthly payments.
- You have to pay for a long period of time – the feeling of accomplishment that you get when you clear off a debt is missing in this form of mortgage payment. You keep on paying for the majority of your life span which can be pretty disappointing for some.
15 year mortgage
A 15 year mortgage payment will be spread across a period of 15 years at a lower interest rate than a 30 year mortgage. However, even though you incur less interest costs, you also lose some financial stability and flexibility since you have to pay more money each month to pay off the mortgage. Here is a list of advantages and disadvantages of a 30 year mortgage plan so you have a clearer idea of the plan.
- You pay less interest money – since you are supposed to pay off your mortgage in a shorter span of time at a lesser interest rate, you don’t pay much towards interest. You are able to save money, on the whole, and can use it later.
- You settle your mortgage early – another great thing about a 15 year mortgage is that you pay it off much earlier than a 30 year mortgage which seems to go on forever! A 15 year mortgage will clear up quicker and also allow you to build equity much faster.
- You make higher monthly payments – the negative point about going with a 15 year mortgage plan is that you have to make higher monthly payments. This can be stressful for some but if you can afford the kind of money it requires, you should definitely go for it.
- You have less financial flexibility – since you pay more money every month towards mortgage, you have less remaining in your account for other things. Paying more money towards mortgage reduces financial flexibility and restricts you in certain ways.
The decision should ultimately be based on your expenses to income ratio. It is important to examine your income and expenditures closely to make this decision. As this post has already discussed, a 15 year mortgage means you will pay less and will be able to pay off quicker. Therefore, if your monthly income allows you to take out more money for mortgage without harming your lifestyle in any way, a 15 year plan would be good for you. On the other hand, if taking out the required amount of money from your monthly income affects your lifestyle and makes it difficult for you to live, you should go for a 30 year plan.
As a general rule, it is a good idea to keep the total amount dedicated towards mortgage payment to less than 30 per cent of your income. Paying over this fraction will cause you discomfort and makes you financially stiff.
Another factor which is important when deciding which mortgage payment plan to go for is your spending habits and the flexibility you require. If taking out certain amount of money from your monthly income removes financial flexibility from your life, you would like to consider a 30 year plan. All in all, it is a complex decision and only you can decide which feels better – having a lot more financial flexibility but paying more towards mortgage or having a little less flexibility but clearing out the mortgage earlier.