Should You Choose a 15- or 30-Year Mortgage?

If you’re shopping for a mortgage, one of the most important decisions you have to make is whether to choose a 15- or 30-year loan. You need to consider your current financial situation and long-term goals to decide which makes more sense for you.

Difference in Payments
A 15-year mortgage will have a significantly higher monthly payment and the same amount of principal than a 30-year mortgage because the repayment term is shorter. Some people simply cannot afford the higher payments associated with the shorter term and choose a 30-year mortgage.

The interest rate on a 15-year mortgage is usually lower than it would be for a 30-year loan. If you can afford to make the higher monthly payments, you can save a significant amount of money in interest over the life of the loan.

Other Priorities
Consider your long-term financial goals when deciding which type of mortgage is better for you. If you have enough income to make higher monthly payments but you don’t have much money saved for retirement or your children’s college education, it might make sense to take out a 30-year mortgage and invest money in a retirement or education account. If you have credit cards with high interest rates, paying them off as soon as possible can save you money. You should also have an emergency fund that you can dip into if you lose your job or your house needs a major repair.

Financial Security
Even if you are working toward all of your financial goals and you can afford the payments for a 15-year mortgage, ask yourself if that would continue to be true in the future. If your company is struggling or downsizing, or you work in a field where circumstances beyond your control could cause your company to suffer, you might want to think twice about taking out a 15-year mortgage. If you were to lose your job, you would be unable to continue making the payments. You might be better off playing it safe and choosing a mortgage with lower monthly payments.

Pay Off the Loan Early
If you choose a 30-year mortgage, you don’t necessarily have to take that long to pay it off. Many lenders will allow you to make additional payments whenever you can afford to do so and apply that money to the principal on the loan. That can lower your balance and interest charges and can allow you to pay off the loan several years in advance.

Look at the Big Picture
A mortgage is probably the most important long-term financial commitment you will make, so you need to choose carefully. With a 15-year mortgage, you can own your home sooner and you can save on interest, but you need to consider whether you can afford the higher payments and still meet your other financial goals. Assess your overall financial picture and figure out what makes the most sense for you.

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