Mortgages: 15 year versus 30 year mortgages

Finding and financing your dream home is a long and arduous process and is one of the biggest commitments you'll ever make in your life. Obtaining the right mortgage is as critical as buying the right property, especially for first time home buyers.

Mortgages may be broadly classified as follows:

1. Fixed and Adjustable Rate Mortgages
2. 15 and 30 year terms

Fixed rate mortgages, as the name implies, is a loan where the interest rate remains fixed over the life of the loan.
In the case of Adjustable Rate Mortgages(ARM)the rate remains fixed for a short initial term - normally one to seven years - and adjusts to the prevailing market rate after that, until the loan is fully paid off. Both types have advantages and disadvantages and should be chosen based on your particular needs. A loan officer or a mortgage broker will be able to advise you on determining your situation. In this article we will discuss in detail 15 year vs. 30 year mortgages.

As with everything else, there are pros & cons to both terms. The table below shows a typical mortgage scenario for a loan amount of $150,000 with a down payment of $50,000 (assuming a purchase price of $200,000).

Fixed Rate Mortgage 15 Years 30 years
Interest Rate 5.875% 6.250%
Est. Closing Costs $3,076 $3,076
Prepaids & Reserves $1,072 $1,072
Monthly Payments P&I $1,255.68 $923.58
Taxes & HO Insurance $503.32 $503.32
Total interest paid
during the life
of the loan $76,021.69 $182,484.38

As can be seen from the table above, the 15 year interest rate is lower than the 30 year rate. But the monthly P&I for the 15 year term is higher by $332.10. The principal gets paid off faster with the shorter term and hence the total interest paid is lower. As mentioned earlier, choose the right type of mortgage based on your situation.

The following factors will help you determine the ideal term for your individual situation and needs.
If you can comfortably afford the extra $332 per month, then by all means choose the 15 year term. If not, choose the 30 year term initially and when your financial situation improves and if the interest rates are low, refinance your mortgage to a 15 year term.
Alternately, take the 30 year term but make an extra principal payment every month, which will help payoff your loan quicker. This affords you flexibility with your cash flow.
However, regardless of what term or type of mortgage loan you take, keep in mind that interest rates keep fluctuating over the years. If the interest rates fall low enough to save you substantially, then refinance your loan, with the same company or shop around for better deals on closing costs. The savings on interest will easily off set the closing costs in a couple of years. You can also change to a different term at that time.
Some companies, especially credit unions, offer Streamline Refinancing which is a simple in house refinance with very low closing costs and very little paper work. But Streamlines are available only if you keep the original term of the note.
Always keep an eye on what's going on in the housing and mortgage market. Timely action could save you thousands of dollars in the long run.

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