15- or 30-Year Mortgage: Which One Is Right for You?
Home buyers have many decisions to make, and among those decisions is which mortgage is right for them. Traditional mortgages come in different types and have different repayment schedules. Understanding the different repayment schedules and how they affect the buyer can help the buyer decide which type of mortgage is right for them.
How Standard Mortgages Work
A mortgage is a home loan with a fixed repayment schedule. If the mortgage has a fixed rate, all payments are equal over the life of the loan. The loan is finished when the principal and interest equals zero.
Difference Between a 15- and 30-Year Mortgage
The primary difference between a 15- and 30- year mortgage is the rate at which the mortgage is paid off. A 30-year mortgage is divided into 360 payments of equal amounts. A 15-year mortgage is 180 payments of equal amounts.
Because the 15-year mortgage is paid off in half the time, the payments are significantly higher. The interest rate, however, is lower for a 15-year mortgage. Home buyers who are able to afford a 15-year mortgage pay less money for their home over the life of the loan.
Why It's Harder to Get a 15-Year Mortgage
One of the things that affects what kind of mortgage a buyer can get is the debt-to-income ratio (DTI). Debt-to-income ratio is the buyer's monthly debt payments divided by their gross monthly income. Most lenders will not approve any loan that pushes the buyer's DTI above 43%.
Since a 15-year mortgage has significantly higher monthly payments, not all home buyers can qualify this type of repayment schedule. The buyer must have a low DTI and a high monthly income in order afford this type of loan.
How to Choose the Right Mortgage for You
15-year mortgages save home buyers money. Over many years, home buyers who have 15-year mortgages can save thousands of dollars. However, 15-year mortgages are not right for everyone. Even if they can qualify for this type of loan, sometimes the higher monthly payment requirements can cause financial strain for the buyer.
A buyer who would like to find out whether a 15-year mortgage is right for them can do so by talking to a lender. A good lender can tell the home buyer how much they would be expected to pay each month if they had a 15-year mortgage, and whether they would even qualify for this type of mortgage. Buyers who are concerned about their ability to pay back a 15-year mortgage can create a budget to help them decide. If the buyer is unable to realistically fit payments for a 15-year mortgage into their budget, then a 30-year mortgage is likely more appropriate.
Work with a Reputable Lender and Real Estate Professional
If you're a North Pole home buyer, work with a reputable lender and real estate professional. By aligning yourself with a team of experienced professionals, you can make better decisions during the home buying process. Your lender can help you decide if a 15-year mortgage is affordable for you, while a real estate professional can help you find a home that will fit in your budget.