Loan Terms
Term: 15 Year vs. 30 Year Mortgages
Choosing between 15 and 30 year terms is not a simple decision. There are pros and cons to each:
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30 Year Mortgages: You will make 360 monthly payments as the principal and interest repayment is amortized over the 30 year life of the loan.
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Advantages:
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Lower Monthly Payments: the cost of borrowing is spread out over a longer period so each monthly payment is smaller
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Easier Qualifications: lower payments mean that it’s easier to qualify for the loan
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Borrow Larger Amounts: since the monthly payment is smaller (than for a 15 year), you can qualify to borrow a larger amount
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Larger Tax Deduction: because you are paying more in interest (than you would with a 15 year), you will get a bigger write-off on your taxes
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Greater Flexibility: with smaller payments, you can decide what to do with any additional income; invest it or pay off more of your loan principal if you want to build equity faster
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Disadvantages:
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Higher Interest Rate: 30 year loans generally have higher interest rates than 15 year
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Build Equity More Slowly: your payments for the first few years are mostly interest and so the percentage of principal you pay off each month is lower
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Higher Overall Cost: the higher rate paid for a longer period of time means that the final cost to own the property will be higher
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15 Year Mortgages: These loans are not as popular as 30 year mortgages, but they are great if your focus is on owning your home sooner
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Advantages:
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Lower Interest Rate: 15 year loans generally have lower interest rates than 30 year loans.
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Build Equity Much Faster: A higher percentage of each (larger) monthly payment goes to paying off the principal, so you build equity in your home much faster.
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Lower Overall Cost: the lower rate paid for a shorter period of time means that the final cost to own the property will be lower.
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Disadvantages:
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Higher Monthly Payments: The loan has to be repaid in half as much time, so each monthly payment is larger
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Harder Qualifications: You need more income to handle the higher monthly payments
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Smaller Tax Deduction: Since you are paying less in interest (than you would with a 30 year), you will get a smaller write-off on your taxes
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Less Flexibility: You are locked into the larger payments and so have less to invest in potentially higher yielding stocks or bonds
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