These other expenses can make up to 1/3 of the typical monthly expense on a 30-year mortgage, so paying off a specified amount of debt in 15 years rather than 30 years may only represent a 30% to 35% larger total monthly payment. There are other costs of ownership including property taxes, insurance, maintenance & in some cases HOA fees. A person who pays off a home in half the time is not making a payment which is twice as large. If a person stretches their loan payments out to 30-years they build limited equity in their home in the early portion of their loan. After the Great Recession this window moved out to about 10 years. Build home equity much faster: Historically American homeowners typically move homes or refinance about every 5 to 7 years.The spreads change over time, but the 15-year is typically about a half a percent lower than the 30-year. Lower interest rates: While both loan types have similar interest rate profiles, the 15-year loan typically offers a lower rate to the 30-year loan.Here are some of the advantages of a 15-year mortgage over a 30-year mortgage: Pros & Cons of 15-Year Fixed-Rate Mortgagesįor those who can afford the slightly higher payment associated with a 15-year mortgage are getting a better deal in almost every possible way. But many people find ways to spend whatever "extra" cash they have laying around & for these people a shorter duration loan that builds equity faster can be a great decision. For those who are disciplined making extra payments while retaining the longer duration loan can be a good move. The flexibility of a 30-year payment plan can be both a blessing and a curse. And if the stock market declines sharply after one invests aggressively near peak valuations then they probably would have been better off using that money to pay down their mortgage quicker. For example, if the cap on mortgage interest deductability is lowered then that benefit is reduced. The above advantages can also be viewed as disadvantages in certain circumstances. Of course the pro for one type of loan is the con for another. ![]() And if an owner comes into some money through a work bonus, an inheritance or another winfall they can apply any extra cash to pay down their loan quicker. If interest rates fall, the home buyer can refinance into a lower rate and/or a shorter duration loan. If interest rates rise, the monthly loan payments do not change. Provided one has a stable job & a stable source of income, financing their home using a 30-year loan offers great flexibility. Slowly paying down mortgage debt while accumulating assets in a tax-advantaged retirement account can help people compound wealth quicker. Homeowners can also deduct mortgage interest expense from their income taxes on the first $750,000 of mortgage debt. If the homeowner has other investments which offer superior returns to real estate then they can invest the monthly difference into those higher yielding investments. This lower payment in turn makes it easier for home buyers to qualify for a larger loan amount. The big advantage of a 30-year home loan over a 15-year loan is a lower monthly payment. Source: Urban Institute Pros & Cons of 30-Year Fixed-Rate Mortgages The following chart shows the blended overall market condition, but if you can compare it against the above chart you can visualize how 15-year loans are much more popular for refinancing than for initial home purchases. 30-year loans are also a popular choice for refinancing homeowners, though the 15-year option is also popular with people refinancing their loans. If one looks exclusively at purchases FRMs are about 90% of the market. It completely dominates the purchase market. Most consumers obtaining mortgages to purchase a home opt for the 30-year fixed-rate mortgage. When interest rates rise consumers tend to shift more toward using adjustable-rate mortgages to purchase homes. When interest rates are low (as they were after the global recession was followed by many rounds of quantitative easing) home buyers have a strong preference for fixed-rate mortgages. Source: Freddie Mac's 2016 home buyer statistics, published on April 17, 2017. The 15-year fixed-rate mortgage is the second most popular home loan choice among Americans, with 6% of borrowers choosing a 15-year loan term. Of those people who finance a purchase, nearly 90% of them opt for a 30-year fixed rate loan. Across the United States 88% of home buyers finance their purchases with a mortgage.
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