Should I get a 15-year or a 30-year mortgage?

By David Pilley on March 15, 2012

With many things, I want to get them done as quickly as possible. Whether it is a doctor’s appointment or a store check-out line, I don’t want to linger in these situations. Do it, and move on. Some things, however, get better over time. Savings accounts and wine are examples that get better as they age. So what exactly should you do with a mortgage loan? Should you get a short period of time, or should you stretch it out?

The two most common types of mortgage loans have a payback time of either 15 years or 30 years. (There are other types, which I will talk about next time, but they are available only under certain circumstances. A 40-year payback, for example, is usually only available after refinancing an existing loan.) The number 30 is a nice number because of the idea that people generally retire after 30 years in the work force. During this 30 year span, you’re working and you may also be raising a family, many of whom may also eventually have mortgages of their own. Presently, a typical mortgage loan will be about $200,000. Getting approved for a mortgage will take a multitude of qualifications, including a good credit score, a debt-to-income ratio no higher than 28%, insurance, and a sizable down payment. The larger your down payment, the lower your mortgage will be. Each monthly payment is amortized (meaning “the same amount”), and along with the loan, you will also be paying interest.

Is a 15-year mortgage or a 30-year mortgage better for you? Each situation is individual, but many financial experts would suggest a 30-year mortgage. I found a financial calculator from KJE Computer Solutions to do a tabulation. The current interest rate (as of the 2nd week of March 2012) of 30-year loans is 4 percent, while the current interest rate of 15-year loans is at 3.4 percent. (Because of a shorter payback period, 15-year loans will always have lower interest rates than 30-year loans.) With a mortgage of $200,000, you will be paying more in interest on a 30-year loan ($143,739, compared to $55,594 on a 15-year loan); however the monthly payment is significantly lower. Each month, you will be paying $954.83 on a 30-year loan; on a 15-year loan, it will be $1,419.96, about $450 more.

Now, there’s nothing wrong with getting a 15-year loan. If you have a solid income (lenders like to see a debt-to-income ratio no higher than 28%, so at least $5,000 a month) and you don’t like paying as much interest, you can certainly tackle the 15-year mortgage. However, a 30-year mortgage is much easier to handle, and you can make it a shorter plan by paying more than the minimum! From Bankrate’s loan calculator (http://www.bankrate.com/calculators/mortgages/loan-calculator.aspx), I plugged in the same information from the above paragraph ($200,000 loan with a 30-year repayment plan, on 4 percent interest). When I added $100 to each monthly payment, I shaved off five whole years. By paying $1,054.83 each month instead of $954.83, the mortgage would be paid off by April 2037. Furthermore, the amount of interest paid would be $116,884.08, nearly 25 grand less than the result from sticking with the minimum monthly payment. A 30-year plan gives you a reasonable minimum payment, as well as the flexibility to pay a little bit more, if you can afford to do so.

Your two main options are 15-year and 30-year mortgages. However, another type of mortgage called an “adjustable-rate mortgage” (ARM) exists. Next time, I’ll talk about these loans and why you may want to stay away from them.

(KJE Solutions link: http://www.dinkytown.net/java/MortgageCompare.html)