A Borrower-Friendly Explanation.
Helping borrowers determine the right mortgage loan term can be tricky. Would they prefer to pay less overall, even if that means committing to higher monthly payments? Or are they content paying more, in the long run, to secure a home with a higher price tag?
Determining whether they prefer a 15-year or 30-year mortgage loan term is a critical step in their homebuying journey. As a starting point, share this high-level guide that answers common borrower questions about 15-year and 30-year mortgage loan terms.
What is a 15-Year Mortgage Loan?
A 15-year mortgage loan is a home loan with a 15-year repayment period. This means that monthly payments are amortized to ensure the home will be paid off after 15 years, assuming each payment is made on time.
What are the Pros and Cons of a 15-Year Mortgage Loan?
Before making any big decisions, it’s important for borrowers to understand the pros and cons of a 15-year mortgage loan.
Some of the primary benefits of obtaining a 15-year mortgage loan include:
- Lower rates. Borrowers are less likely to default on shorter loans than longer ones, which means less risk for lenders. So, 15-year mortgage loans tend to come with lower interest rates.
- Less spent on interest. In addition to enjoying lower rates right off the bat, borrowers should keep in mind that they’d be paying on the loan for only 15 years as opposed to 30. That means the potential for significant savings in the long run.
- Forced savings. The increase in monthly payment amount that accompanies a 15-year mortgage loan is often considered a kind of forced savings. This is because, as the loan is paid down, borrowers are also growing equity as it appreciates.
Some of the primary drawbacks of obtaining a 15-year mortgage loan include:
- Higher payments. As borrowers need to pay the mortgage off twice as fast, 15-year mortgage loans come with higher monthly payments.
- Less affordability. Borrowers might need to shop around for less expensive homes with a 15-year mortgage loan. That’s because lenders may approve a maximum spend per month. As 15-year mortgage loans come with higher monthly costs, that translates to the need for a less expensive home.
- Less financial flexibility. With more money going toward your mortgage payment, borrowers naturally have less on hand. This might mean dipping into existing savings, putting off future savings goals, or otherwise managing with less financial flexibility.
What is a 30-Year Mortgage Loan?
On the other hand, a 30-year mortgage loan is a home loan with a 30-year repayment period. With this loan type, payments are amortized to ensure the home will be paid off after 30 years, assuming each payment is made on time.
What are the Pros and Cons of a 30-Year Mortgage Loan?
Before making any big decisions, it’s important for borrowers to understand the pros and cons of a 30-year mortgage loan.
Some of the primary benefits of obtaining a 30-year mortgage loan include:
- Lower payments. As borrowers have longer to pay the loan off, they would enjoy lower monthly payments with a 30-year mortgage loan.
- Greater affordability. Because 30-year mortgage loans come with lower monthly payments, borrowers may be able to secure a more expensive home.
- Easier to qualify for. Because smaller monthly payments are more manageable for most borrowers, 30-year mortgage loans tend to be easier to qualify for. This means that, if homeownership is a pressing goal for your borrowers, a 30-year mortgage loan might be the way to go.
- Flexibility for other expenses. With a lower monthly payment amount, borrowers have more cash on hand to tackle savings goals, address emergencies, or otherwise experience some greater flexibility.
Some of the primary drawbacks of obtaining a 30-year mortgage loan include:
- Higher interest rates. With a 30-year mortgage loan, borrowers have 15 more years to potentially default on their loan. That means more risk for lenders, which comes with a higher interest rate.
- More spent on interest. With higher rates and a longer repayment period, borrowers with 30-year mortgages spend more interest over the life of their loan.
- Potential to overborrow. When borrowers qualify for a larger mortgage, they might be tempted to purchase a home that stretches their financial limits. This could diminish any meaningful cushion they might have for savings, emergencies, and more.
How Do Borrowers Choose Between a 15-Year vs 30-Year Mortgage Loan?
So, which loan type is right for your borrowers? Are they leaning toward a 15-year or 30-year mortgage? The good news is that there are no wrong answers!
As a home loan professional, it’s important to position yourself as a resource. After all, you’re there to help answer any outstanding questions and determine which mortgage loan aligns with each borrower’s financial goals.
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