Mortgage Terms

When buying a home, the vast majority of people choose a 30-year mortgage instead of a 15-year one, but shorter-term loans are often worth considering.

Many people bypass 15-year fixed-rate mortgages because those loans require significantly higher mortgage payments. As an example, if you’re buying a $250,000 home with a 20% down payment ($50,000), you’ll be borrowing $200,000. At recent interest rates, you’d pay around $1,400 per month with a 15-year loan or roughly $930 per month with a 30-year loan. That heftier payment may be a drag, but the shorter-term loan will have you paying total interest of only about $52,000, versus a whopping $135,500 for a 30-year loan. That’s a big deal, and it will save you a lot of money — which could be used in better ways, such as putting it away for retirement.

Another key advantage of a 15-year fixed-rate mortgage is that by paying off the principal more rapidly, you’ll build equity in your home faster — making you the sole owner of your home much sooner. This can be particularly attractive if you’re aiming to enter retirement without mortgage payments. A 15-year mortgage will also typically feature a lower interest rate than a 30-year loan.

A 30-year mortgage has its own advantages, starting with a smaller monthly payment. That can help you buy more house than a shorter-term loan would (though bigger homes do cost more for taxes, insurance and upkeep). Thus, you can end up with more money in your pocket that you can use toward other financial goals. It will give you bigger tax deductions — but only because you’re paying a lot in interest.

One excellent strategy is to get a 30-year fixed rate mortgage that allows prepayments, and then make lots of extra payments over the years. You’ll need discipline to keep paying extra, but it will shorten the life of the loan and save you a lot in interest. With this strategy, you can also skip extra payments when necessary, as they’re not required by the bank.