Mortgages come in all shapes and sizes, from low down-payment options to jumbo loans. Beyond the type of mortgage you choose, you must also decide how long you want to repay the loan, which is called the mortgage term.
There are many different types of mortgages available to help you purchase a home, but the most common ones tend to last 15 or 30 years. If you want lower monthly payments, you may have to stretch your home loan to 30 years. A 15-year mortgage may have higher monthly payments but reduces the life of the loan in half, which also cuts down on how much interest you pay.
To determine what type of mortgage works better for you and compare your total costs, simply plug in the total cost of the home, your expected down payment amount, and the interest rate below.
When you get a traditional 30-year mortgage, you pay a set principal and interest amount every month divided over 30 years, or until you sell the home and pay off the mortgage sooner.
Similar to the 30-year mortgage, you will have a set monthly payment based on the principal and interest but divided over 15 years.
Both a 15-year and 30-year mortgage can have fixed interest rates and fixed monthly payments over the life of the loan. However, a 15-year mortgage means you will have your home paid off in 15 years rather than the full, 30-year mortgage so long as you make the required minimum monthly payments.
The 15-year mortgage tends to have a lower interest rate, though mortgage rates overall have been low for some time. However, the monthly payments are higher on a 15-year mortgage because you are paying the principal off faster than on a 30-year mortgage.
Deciding between the two depends on your financial situation, including your credit score and history, your down payment, and how much cash reserves you’d like to maintain every month.
A 15-year mortgage might be a better fit if you have more monthly cash on hand and want to pay off your home faster, for example. Alternatively, a 30-year mortgage might be better for someone who has a more limited budget or wants to save cash by paying less toward their mortgage but for a longer period. A longer-term mortgage also might make more sense if you plan to stay for decades.
The interest rate environment also plays a factor in how long you want to stretch out your mortgage. For example, if rates are low, it might make more sense to lock in that low rate for a longer-term and then use your extra monthly cash to invest in something else that has a higher rate of return at the time, like stocks or buying an investment property. Whereas, if interest rates are high, you might want to get a shorter-term mortgage so you only pay that interest rate for 15 years rather than 30 years.
There’s also the option to refinance from a 30-year mortgage to a 15-year mortgage down the road if your financial situation changes and you want to pay off your home loan faster or lower your interest rate.
At Valleywide Realty, we can help you find the right property in the Central Valley.
To get started with your home search, or to speak with us about selling your home, contact us today by calling (209) 831-9747 or click here to connect with us online.