15-year vs 30-year Mortgage Calculator 2021CASAPLORERTrusted & Transparent
Every mortgage has a mortgage term. Some programs will allow you to choose a unique mortgage term but for most mortgage programs including both private and government-backed, you are limited to a choice between a 15-year or 30-year term. This choice is critical and you should consider multiple factors before making a decision. With a different mortgage term, only your principal balance payments and total interest expense change because your Property Tax, Homeowners Insurance, and HOA fees stay fixed whether you have a mortgage or not. Other considerations include the flexibility of a 30-year mortgage and the cost of refinancing.
Monthly Payment 15-Years vs 30-Years
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15-Year vs 30-Year Mortgage Comparison
The primary benefit to a 15-year mortgage vs a 30-year mortgage is that each month, you are paying off more of your principal balance. You may think that to reduce your mortgage term by half, you have to pay twice as much each month, but you actually pay much less than that. This is because your mortgage rate stays the same, so your interest expense remains fixed. With a $300,000 mortgage, a 20% down payment, and a 3% interest rate, you would only have to increase your monthly payment by $645 to reduce your mortgage from a 30-year term to a 15-year term. This is just a 40% increase from your monthly payments for a 30-year mortgage. Every additional dollar you add to your monthly payment is used to directly pay off your principal balance. This advantage is used when you make early mortgage payments.
Your mortgage rate remains constant whether you get a 15-year or 30-year mortgage. However, if you pay off your principal amount faster, there will be less interest expense. This is because your mortgage rate only applies to the remaining principal balance of your mortgage. For example, you do not pay interest on your down payment amount because you are not borrowing that money. This is where your actual savings throughout your mortgage term come from. Using an amortization calculator, you can see that when reducing your amortization length, only the total interest cost decreases.
While it seems like a 15-year mortgage is great if you can afford it, a 15-year mortgage has downsides as well. With most mortgages, you can make early mortgage payments in addition to your monthly payments that can reduce your mortgage term. However, if you get a 15-year mortgage, you cannot extend your mortgage term because you would just be missing payments.
You can also refinance your 30-year mortgage into a 15-year mortgage if your income increases in the future. Doing this may involve some refinancing costs. However, you have the option to wait before shortening your mortgage term instead of locking yourself into a 15-year mortgage. Before signing your mortgage contract or agreeing on mortgage terms, always ask your lender about the conditions associated with paying off your mortgage early. 30-year mortgages provide a significant amount of flexibility compared to a 15-year loan only if you can take advantage of potentially making additional payments. If your mortgage payments are flexible, you are not locked in for 30 years but instead, you have a mortgage that starts with a 30-year term.
The 30% Rule
Balancing the mortgage affordability and interest savings may seem ambiguous, but government-backed agencies give home buyers a recommendation for mortgage amounts. The 30% rule recommends that your mortgage payments should be at most 30% of your annual income before taxes. If with a 15-year term, your annual mortgage payments are less than 30% of your gross income, you should get a 15-year mortgage because you can save on interest with low risk. Your income is high enough that you can make large payments towards your mortgage and still have enough leftover for other expenses. Otherwise, you should get a 30-year mortgage and make early mortgage payments. You can also refinance later when your financial situation improves. By only using 30% of your income for your mortgage payments, you ensure that you have a suitable amount left to spend on other aspects of your life and you can save in case of an emergency.