High monthly payments will usually turn off a home buyer. It’s natural for someone to want to spread a high payment platform across a number of years. By doing so, you forgo the chance to save a lot of money.
Saving Money: The Pros
By borrowing money over a 15-year period, you will save more money than you will over a span of 30 years.
If you choose to go with a 15-year plan, you will pay less than half of what you would pay for in the long run with a 30 year mortgage. 15 years of annual interest does add up and can cost you plenty of money.
Expect to see lower interest rates when choosing a shorter-term loan. Banks are less hesitant to fund you when you go this route. You will also see your mortgage come with a quarter point or whole point less interest rate versus the longer-term loan.
If government-sponsored companies are backing your mortgage, expect to pay fewer fees with 15-year loans. By also tacking on what are known as loan level adjustments to 30-year mortgages, short-term lenders can save some money.
Short-term mortgages are undoubtedly expensive. Monthly payments can range from $2,000 and up depending on your rate.
By paying higher monthly amounts, prospective home buyers may have to settle for a smaller house. 30-year mortgages, offering lower monthly payments, can jumpstart your home buying process.
Savings accounts will be reduced and a higher cash reserve must be maintained to be able to afford this loan.
Fewer homeowner and refinancers choose this route. According to the Mortgage Bankers Association, 5% of homeowners and 20% of refinancers take a 15-year mortgage.
To Wrap it Up
Mortgages are ultimately one of the most expensive things that you will invest your money into. Factor in the annual interest you pay on top of your loan, and you can see some high payments. The length of your mortgage has its positives and negatives. If your financial situation allows it, you can go with a 15-year term which saves you money in the long run but forces you to settle with higher payments. Or, you can choose a 30-year mortgage which lowers your monthly payments but increases the total amount you would spend by 50% over the course of the 30 years in comparison to the 15-year term. Determining which mortgage is right for you depend primarily on your finances and your ability to maintain your payments.
Kuba Jewgieniew is the head of Realty ONE Group, a real estate broker that continues to lead the industry in creative and bold new ways. Contact Realty ONE Group now for all your real estate needs.