The most common type of home loan is the fixed-rate mortgage. The interest rate remains the same for the life of the loan, so the principal and interest you pay remain the same, too.
A mortgage’s term is the number of years you have to pay it. You have two main choices: a 30-year term or a 15-year term.
30-Year Vs. 15-Year Mortgages
30-year:
Pro
- For a given loan amount, the monthly payments are lower.
Cons
- You pay more total interest over the life of the loan.
- The interest rate is higher.
15-year:
Pros
- You pay less total interest over the life of the loan.
- The interest rate is lower.
Con
- For a given loan amount, the monthly payments are higher.
The 30-year fixed-rate mortgage is more popular than the 15-year because it provides a lower monthly payment for the same loan amount. This means that if you know how much you can afford every month, you can borrow more money — and get a more expensive home — with a 30-year fixed.
Similar Payments, Different Amounts
Gene can afford about $1,000 a month in principal and interest. Gene can choose between a 30-year fixed with an interest rate of 4.5 percent and a 15-year fixed at 4 percent:
- 30-year fixed at 4.5 percent: $1,013 monthly principal and interest for a $200,000 loan.
- 15-year fixed at 4 percent: $1,013 monthly principal and interest for a $137,000 loan.
For the same monthly payment, Gene can borrow $63,000 more with a 30-year fixed.
But that’s not the entire story. For the same loan amount, you pay more interest with a 30-year fixed.
Same Amounts, Different Interest
For a $200,000 mortgage:
- 30-year fixed at 4.5 percent: $164,813 total interest for the life of the loan.
- 15-year fixed at 4 percent: $66,288 total interest for the life of the loan, or $98,525 less.
