Many borrowers automatically assume they have to take a 30-year loan term. That’s not the case, though. Many lenders offer a variety of loan options including the 15-year term. You can even ask for a 20 or 25-year term if the 15-year term isn’t right for you.
Speaking of just the 15 or 30-year term, how do you decide which one is right for you? We give you some questions to ask yourself below.
What can You Afford?
The 15-year term cuts the 30-year term in half. This means that you’ll pay a lot more principal each month in order to pay the loan off in 15 years. Do you have the money to cover this type of payment? Is your job secure enough that you are comfortable of your ability to make that higher payment for at least 15 years?
If your job is unstable or you are unsure of the direction you’ll take in your career moving forward, you may not want to strap yourself with such a large mortgage payment. You can take the 30-year loan and enjoy the lower payments. Yes, you’ll pay on theloan for an extra 15 years, but you’ll have the peace of mind knowing that your loan isn’t unbearable to afford each month.
Do You Have Debt?
15-year mortgage paymentsusually tie up a large chunk of a borrower’s monthly income. If you have debt, it could be hard to get yourself out of that debt plus pay your mortgage. The 15-year term is reserved for those that are in a good financial position and don’t have to worry about credit card payments or student loans.
The 30-year term will give you more money on a monthly basis because you won’t have to pay so much towards the mortgage. Even though it extends your loan for 15 years, it’s a great way to make sure you have enough disposable income each month even after taking care of your monthly debts.
What are Your Goals?
Do you have plans or goals for the future? If you take on a mortgage payment that is too much, you may not be able to reach those goals. Maybe you have a dream vacation planned or you want to get out of credit card debt within the next five years. Some borrowers start off homeownership with two incomes, but then cut down to one once they have a family.
Whatever your case may be, make sure that the mortgage payment aligns with your goals. If you need a certain amount of disposable income each month, make sure you have it with the mortgage term that you choose.
Choosing the 30-Year but Making 15-year Payments
There is one trick of the trade that many people are unaware of how it benefits them. If you want to take the safe route, you can take the 30-year loan. This way you have minimum required payments each month. If you can afford it, though, you are free to make 15-year payments in most cases. You just need a mortgage calculator to help you figure out what the 15-year payment would be.
If you make the extra payments, just make sure that you note your check or online payment form that the extra funds go towards the loan’s principal. If you continue to make payments this way, you can pay your loan off in 15 years, but without the requirement to do so.
This gives you a little leeway should you not be able to make the larger payment for a while. Let’s say that you lose your job and are trying to keep things tight to make ends meet. You can resort back to the 30-year minimum monthly payment rather than paying the extra money towards your principal. When you get back on your feet again, you can make the extra payments again. While you won’t pay the loan off in 15 years, you’ll still shave many years off the loan’s term.
There isn’t a ‘better’ choice between the 15-year and 30-year term. It depends on your financial situation and your plans for the future. If you think you can afford it, go ahead and take the 15-year term. You’ll cut the interest you pay over the life of the loan in half. If you aren’t sure, though, opt for the 30-year term and just make sure the lender is okay with you making extra payments when you are able. This way you get the best of both worlds.