A home buyer has a lot of decisions to make. One of the biggest is what kind of mortgage to choose. While the 30-year mortgage is standard for many citizens buying a home in North Carolina, there are other options available, including terms ranging from 10 years to 30, with 15-year and 30-year being the most common. Read on to learn the differences between 15- and 30-year mortgages to help you learn which one might be the right choice for you.
Cost of the Monthly Payment
A 30-year mortgage generally provides the lowest monthly. This is because you are spreading out the payments on your mortgage over 30 years. If you choose a 15-year mortgage, you are borrowing the same amount of money, but only spreading out the cost of repaying that loan over 15 years. Therefore, to pay that same loan off, your monthly payments will be much higher on a 15-year mortgage than they would be on a 30-year mortgage. However, the size of the monthly payment isn’t the only thing to consider.
The Interest Rate
When using a 30-year mortgage, you have longer to pay off the balance of your loan. That also means that, from a lender’s standpoint, you have longer to default on that loan, too. Because 15-year loans are considered less risky for lenders, they usually come with a lower interest rate than a 30-year loan would have. Although the interest rate difference will likely be slight, the savings in interest can really begin to add up over the years.
The Amortization Schedule
When you close on a loan, you will be given an amortization schedule that clearly shows how much of your monthly payment goes toward principal, interest, taxes, insurance and any other fees your loan may have attached. In general, the more time that has passed from when you took out the loan, the more of your monthly payment goes toward the principal balance. That means that in the first few months of your mortgage you are paying mostly interest, and in the last few months you are paying mostly principal. Your monthly payment will stay the same as long as your mortgage has a fixed interest rate. If you choose a 15-year mortgage term, that amortization schedule accelerates, which can save you money additional interest in the long run.
Can You Get the Best of Both Worlds?
There are many pros and cons of any mortgage term. However, there is a way that you can get some of the best of both worlds. Choosing a 30-year mortgage will give you the smallest possible monthly payment, however, if you don’t have a prepayment penalty attached to your loan, you can still pay off your mortgage faster. Accelerating your payments, or paying more towards the principal, can help you pay off your loan more quickly and save you hundreds or even thousands of dollars of interest in the long run, and if there comes a time when you can’t pay the larger payment to pay your mortgage off at an accelerated rate, you can easily go back to paying the required monthly payment.
There are many things to consider when choosing which mortgage term is right for you, and your lender can help you make the right decisions for your financial situation. The NC Housing Finance Agency works with participating lenders statewide who can help you make the best choices for you and offers affordable mortgage options when you’re ready to buy. Find a lender near you at www.nchfa.com/home-buyers.
