How Mortgages Work: Introduction to 30-Year Loans vs. 15-Year Loans

How Mortgages Work: Introduction to 30-Year Loans vs. 15-Year Loans

There are as many types of mortgages to choose from as there are types of houses to buy. Here you'll learn the pros and cons of a 30-year fixed mortgage and a 15-year fixed mortgage.

Lenders offer several types of mortgages, but the most common are fixed-rate mortgages. These loans feature fixed rates and monthly payments, generally for 15-year and 30-year periods. They're popular because consumers balk at the thought of their house payment rising and falling with interest rates and whenever rates are low, fixed-rate mortgages are very affordable.

Fixed-rate loan borrowers face one major choice: 15 year or 30 year? For some, a 30-year loan makes more sense. For others, a 15-year one does. Here are some pros and cons of each.

30-Year Fixed Rate Advantages

a. Offers the chance to borrow money on a long-term basis without having to worry about the interest rates or payments changing.
b. Monthly payments are lower than those on 15-year loans because the interest is amortized over a longer period.
c. Lower monthly payments free up money that borrowers can pour into investments that yield more than their homes.Higher interest bill increases the amount consumers can deduct at tax time, potentially reducing or eliminating their federal income tax liabilities.

30-Year Fixed Rate Disadvantages

a. Borrowers build equity at a very slow pace because payments during the first several years go largely toward interest rather than principal.
b. The overall interest bill is much higher because of the long amortization term.
c. The interest rates are higher than on 15-year loans.

15-Year Fixed Rate Advantages

a. Borrowers build equity much more quickly due to shorter amortization schedules.
b. Overall interest bills are dramatically lower than those on longer-term loans.
c. The interest rates are lower than 30-year loans.

15-Year Fixed Rate Disadvantages

a. Monthly payments can be significantly higher than those on 30-year loans.
b. Restricts home buyers to smaller house than they might be able to afford with longer-term loans.

If you need help qualifying for a loan for a Phoenix historic home or Phoenix Metro home purchase, call Laura Boyajian, aka Laura B. today.