Which is better, a 30-year or a 15-year fixed rate mortgage?

Financing Solutions with David Reed

Five Year Increments

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An Agent's Guide to Financing Solutions

Mortgages 101

Mortgage Confidential

Which is better, a 30-year or a 15-year fixed rate mortgage?  A common and important question which, when answered, affects both the monthly payment and the amount of interest paid on a mortgage loan. While paying less interest over a shorter timeframe seems to be the obvious answer, the difference in monthly payment is surprising to some.

For instance, on a $300,000 note at 6.25 percent over 30 years, the principal and interest payment is $1,847 per month. Whereas on that same loan amount over 15 years at 6 percent, the payment jumps to $2,531! It's easy to understand why most choose a 30-year loan over a 15-year loan; not only is the payment lower but it takes less income to qualify.

On the other hand, more money goes to interest on a 30-year loan compared to a 15-year loan. Using those same figures, the 30-year note yields $364,920 of interest, most of it in the first 10 years of the loan, while the 15-year loan only requires $155,580. That's less than half the interest that a 30-year loan produces!

So, which is better? Maybe neither.

While few lenders advertise this, there's a compromise available to you. Loan payment periods can actually be acquired in five year increments. You don't have to choose between a 30 and a 15-year loan! You can select a 10, 15, 20, 25 or 30 year mortgage. Some lenders even offer 40-year loans. Now it's possible to both keep monthly payments manageable and save on interest charges.

Since these five year increments aren't advertised you'll typically have to ask your loan officer for a quote. Don't be shy, you'll find out that you just might be able to have the best of both worlds: lower payments with reduced interest charges!

Written by David Reed, author of Mortgage 101 and Mortgage Confidential.