When you talk to your loan officer and get an interest rate
update more than likely the loan officer will turn directly to the 30 year
fixed rate loan. Why? Because it’s the most popular loan choice, that’s why.
It’s also the most heavily advertised and promoted. When lenders quote and
advertise a home loan program they also are required to quote the appropriate
annual percentage rate, or APR. Lenders have multiple loan programs from which
to choose from fixed to adjustable to variable but there really isn’t the time or
space when doing so to quote every loan program across the board. Instead, the
30 year loan term is the most common and most familiar with borrowers. But are
borrowers short-changing themselves when they only look at a 30 year term?
Let’s look at why a 15 year mortgage can make sense.
There’s a tradeoff between the 30 and 15 year loan. The 30
year loan, because it’s spread out over a longer period, will have lower
monthly payments compared to a 15 year loan on the same rate and loan amount.
However, because it is spread out over 30 years, there’s a lot more interest
given to the lender and it takes longer to pay down the mortgage. If you take a
$300,000 loan and a rate of 4.0% over 30 years the monthly payment is $1,432.
Halfway through the loan term, the balance is just over $193,000.
With a 15 year loan at 4.0% the payment is $2,219 and
halfway through the loan term the balance is just over $191,000. To get to the
same loan balance with the 30 and 15 year loan it takes 15 years for the 30
year loan and half that time with a 15 year.
You do need to notice the difference in monthly payments.
The 15 year loan is noticeably higher than the 30 year but if savings on
interest payments and paying down the loan balance is a priority then the 15
year loan term just might be your better choice.