Tuesday, November 10, 2015

15-Year Fixed Rate Mortgage vs. 30-Year

When choosing to finance a new home at the Lake of the Ozarks, you will have several different decisions to make. One of those decisions will be the length of the term for the loan. The mortgage's "term" refers to the number of years that you will spend paying off the loan. You have two basic options for length of term to choose from: a 15-year term or a 30-year term. Let's take a look at the pros and cons of each type:

30-Year Fixed Rate Mortgage 

The 30-year fixed rate mortgage is the most popular, as it allows for lower monthly payments on the same loan amount. This means that if you know how much you can afford each month for a house payment, you can borrow more money to get a more expensive house by choosing a 30-year fixed rate mortgage. However, since you get more time to pay off the loan, there is a cost.

  • Lower monthly mortgage payments  
  • Easier to qualify 
  • Ability to buy more with a smaller payment 
  • Can always pay extra if you want 
  • Good for those looking to invest money elsewhere

  • More total interest over the life of the loan
  • Higher interest rate 
  • Build home equity very slowly 
  • Harder to refinance
  • You won't own your home outright for 30 years

15-Year Fixed Rate Mortgage 

While 30-year terms may be more popular, a 15-year fixed rate mortgage offers the best value. If you can afford to make higher monthly payments, this would be the better option in terms of saving money in the long term. This type of mortgage is also harder to qualify for as you're required to pay a substantially higher amount each month. Therefore, for some borrowers, this option may not even be a possibility.  

  • Less total interest over the life of the loan.
  • Lower interest rate 
  • Build home equity faster 
  • Own your home free and clear in half the time 
  • Good for those close to retirement and/or conservative investors

  • Higher monthly mortgage payments 
  • Harder to qualify 
  • May not be able to buy as much house as you want 
  • You may have all your money locked up in your house 
  • You could get a better return for your money elsewhere

Things to Consider

Mortgages aren't one size fits all. There are several things to consider when choosing the terms for your Lake of the Ozarks home loan

1. What can you afford?  

The monthly mortgage payment on a 30-year term will typically work out to be several hundred dollars less than the payment of a 15-year term. If you can't comfortably make the payments on a 15-year mortgage, then the 30-year term is the better option for you. You can always make extra payments when possible to pay it off faster, but you won't be locked into a price you can't afford each month.

2. How much do you have in your emergency fund? 

Once you choose the type of loan you're going to get, you'll be expected to pay that set amount each month. If you choose to go with the higher payment option in order to save money in the long run, your savings account needs to have enough money to cover you if something unexpected happens such as losing your job. If you don't have much in terms of an emergency fund, you're better off going with the 30-year fixed mortgage and building your savings with any extra money you have.

3. How do you feel about debt? 

Many people are strongly adverse to debt of any kind. Managing debt isn't easy and for many people staying out of debt completely is the way to go. It comes down to your appetite for risk. By choosing the 30-year fixed rate mortgage, your risk of not being able to make your payments is lower, but you will be in debt for a longer period of time.

4. What kind of personal discipline do you have? 

If you can afford the payments on a 15-year loan, but you’re concerned about the possibility of job loss or other major financial hits, you might be hesitant to commit to the higher payments. In that case, the better option might be the 30-year fixed rate mortgage. You can actually pay it off in 15 years if you want, but it will require strong personal discipline. Many people find it hard to pay extra on their mortgage at the Lake of the Ozarks when it's not mandated by the bank. According to the Federal Deposit Insurance Corporation (FDIC), 97.3 percent of people do not consistently pay extra on their mortgages. What the statistic doesn't show though, is how many of those people would have fallen behind on their mortgages had they been locked into a higher payment with the 15-year fixed rate mortgage.

5. What about the tax breaks? 

While a 30-year mortgage does offer more of a tax break, the reason is because you're paying significantly more in interest. For that reason, the tax breaks shouldn't be your only consideration when choosing the term for your mortgage loan. In the end, it all comes down to your personal financial situation to determine what term best suits your individual needs and ability.

To discuss the best loan options for your unique situation, give your Lake of the Ozarks mortgage lender a call at 573-746-7211. When it comes to your financing needs, I'm committed to working with you every step of the way. I'll discuss financing options, offer competitive interest rates and back it up with the first class service you deserve.

For Lake area news, resources and tips on financial services, please 

Michael Lasson
Sr. Residential Mortgage Lender
NMLS #: 493712

2265 Bagnell Dam Blvd, Suite B
PO Box 1449
Lake Ozark, MO 65049

Direct:  (573) 746-7211

Email:  mlasson@fsbfinancial.com

**The postings on this site are my own and do not necessarily represent First State Bank of St Charles’s positions, strategies, or opinions.

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