I already blogged about some of the most common types of mortgages out there, but I would like to spend some time comparing the two most common ones: the 15 Year Fixed Rate Mortgage versus 30 Year Fixed Rate Mortgage. Though most people go for the 30 Year Mortgage, mainly so they can afford the monthly mortgage payments, I think the 15 year fixed rate mortgage has some advantages worth considering.
THE 15 YEAR FIXED RATE MORTGAGE
ADVANTAGES:
• Because this type of mortgage is paid off in half the time, it can save you as much as 50% in interest paid.
• Permanent and predictable repayment schedule
• Since banks get their money back sooner, they often offer a reduced interest rate on a 15 year mortgage.
• Also, there is a much faster equity build up.
DISADVATAGES:
• Obviously, there is a much higher monthly payment
• Opportunity cost in terms of tax savings. With a 15 year mortgage, you will not be able to take advantage of all the tax savings from mortgage interest deductions to the same extend you would with a 30 year mortgage.
• A 15 year mortgage cannot be extended, should you need it. But, a 30 year mortgage can be paid off in 15 years with accelerated monthly payments – hopefully without a early repayment penalty (depending on your lender).
THE 30 YEAR FIXED RATE MORTGAGE
ADVANTAGES:
• As previously mentioned, this mortgage offers a reasonable monthly payment
• Also, it offers a permanent repayment schedule, so you don’t have to worry about fluctuating mortgage payments. Therefore, your household budget is easier to manage and plan with.
• Just like any fixed rate mortgage, it offers you protection from future increases in interest rates.
DISADVATANGES:
• Even though it protects you from future interest rate increases, its interest won’t drop if the market changes, so you might be stuck paying a higher interest than the current market.
• In case you decide to refinance to get a lower rate, you might be forced to pay closing costs associated with the new mortgage and other processing fees, depending on how competitive the mortgage market is at the time.
But, there is another option out there, sort of a “happy medium” between a 15 and a 30 year mortgage. It is biweekly mortgage and I will discuss that in my next article.
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