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Wednesday, 03 October 2007 |
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Which is better a 30-year loan or a 15-year loan? The term of the mortgage is the period used to determine the mortgage payment. Term selection is usually associated with a fixed rate mortgage. You have the option to choose a term loan of as little as 10-years and as high as 40-years. The longer the length of the loan the smaller the payments will be, but also the longer it takes for the borrower to build any equity. The shorter the length of the loan the more rapid the reduction of the balance of the loan. The 15-year loan is the best deal around for the borrower.
If the borrower can not afford the payment on the 15-year loan they will usually opt for the 30-year loan. If a borrower has trouble with that loan payment, the interest only option for the first 5 or 10 years would be a better deal than on the 40-year loan and more effective in lower the payments. The longer the loan the smaller the payments, but the shorter the loan the more equity you have in your home. If you choose a 30-year loan on a $100.000 at 7 percent interest you payment will be $665. If you choose a 15-year loan with the same dollar amount and interest rate, your payment will be $885. The lower payment might look attractive, but after 5 years of making payment on the same loan, the 15-year loan has repaid $22,933 while the 30-year loan has only repaid $5,868. The difference will be $17,065 can be much more attractive. However, if you opt for the 30-year loan to free up funds to cover payments on other things. Many of those that opted for the 30-year loan find out later that they really don't like the extra 15 years of payments. Ordinarily there isn't an advantage in shortening the term from 30 to 25-years or from 15 to 10-years. If you want to pay the loan off sooner, you can opt for the longer-term loan and then make the payments of the shorter-term loan. The main advantage to the shorter-term loan is the payoff is sooner and the equity paid into the home rises much more rapidly over the course of the term. Some borrowers do not have the self-discipline to make a voluntary extra payment every month. These are the one who are attracted by the biweekly payment plans offered by many of the lenders. Under a biweekly plan instead of one monthly payment, the buyer pays half the monthly payment ever two weeks. By making payments biweekly, the buyer is actually making the equivalent to 13 monthly payments. The extra payment every y ear builds equity faster. There is one situation where the buyer that can afford the 15-year loan payment and opt for the 30-year instead could be doing himself a favor. A buyer with attractive investment opportunities would be using the savings on the payment of his home to invest into a venture that could conceivably earn a larger yield than increasing the equity of their home. |
