Yale Roth M.A., M.Ed

Homeowners and first time home buyers are ofter unsure what type of fixed rate mortgage to take out. 

They ask, “Is a 30 year fixed mortgage a better mortgage than the 15 year fixed mortgage?”

My answer is, “it depends.”

The answer also is based on the homeowners’ or first time home buyers’ goals and objectives.

Here’s what I mean.

First, I will outline the pros and cons of both mortgage types.

First the 30 year fixed mortgage.

Pros:

The mortgage rate is fixed for 30 years and won’t change during that term.

The mortgage is amortized over a 30 year period which keeps the mortgage payment lower – in comparison to a shorter term mortgage.

You can prepay (if there is no stated prepayment penalty) against the 30 year mortgage – which means, you can pay more than the minimum required mortgage payment.

This will allow you to shorten the mortgage term, pay less in overall mortgage interest, reduce the net effective mortgage rate you’re being charged, and save money on the back end of the mortgage by having it pay off early.

Here are the cons of the 30 year fixed mortgage.

You’re not going to start really build equity in the home until about 15 years into the mortgage.

So, that means that after 15 years of making payments, about half of your principal and interest mortgage payment is going to principal reduction and half to mortgage interest.  In other words, you’re going to be paying the bulk of mortgage interest upfront, in the first half of the mortgage term.

Here are the benefits to the 15 year fixed mortgage.  By the way, this can be applied to any shorter term mortgage.

Pros:

The mortgage rate will generally be lower for the shorter term mortgage in comparison to the 30 year fixed mortgage.

You are building home equity up at a faster rate as a greater portion of your mortgage payment is applied to principal reduction.

You’re saving money in mortgage payments that you would otherwise be making on a 30 year fixed mortgage in a shorter term mortgage as the loan would be paid off sooner.

The overall amount of mortgage interest that you’ll save is greater and the net effective mortgage interest rate will be lower.

Here are the cons:

The mortgage principal and interest payment will be higher beacause the mortgage term is shorter.

You have to weigh the pros and cons and see what makes most sense for you.

In conclusion, whether you’re a current homeowner or first time home buyer, is a 30 year fixed mortgage better than a 15 year fixed mortgage?

It depends on what your goals and objectives are and after analyzing the pros and cons, you can detrmine which mortgage type is better for you.

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