Why choose a 15-year mortgage over a 30-year?
The 15-year mortgage has some advantages when compared to the 30-year, such as less overall interest paid, a lower interest rate, lower fees, and forced savings.
Lenders charge a lower interest rate for 15-year loans because it's easier to make predictions about repayment over a 15-year horizon than it is over a 30-year horizon. Another reason for the savings? Home buyers are borrowing the money for half the time, which dramatically reduces the cost of borrowing.
A: Dave Ramsey recommends a 15-year, fixed-rate conventional loan.
Choosing a 25-year term will be cheaper in the long run, but make sure you can afford the higher monthly payments. If a shorter term makes repayments too expensive, consider the longer 30-year term.
The 15-year mortgage has some advantages when compared to the 30-year, such as less overall interest paid, a lower interest rate, lower fees, and forced savings. There are, however, some disadvantages as well, such as higher monthly payments, less affordability, and less money going toward savings.
If you have a 15-year loan, the halfway point is 7.5 years. The PMI payments must stop even if your mortgage balance hasn't yet reached 78 percent of the home's original value.
On a salary of $36,000 per year, you can afford a house priced around $100,000-$110,000 with a monthly payment of just over $1,000. This assumes you have no other debts you're paying off, but also that you haven't been able to save much for a down payment.
Assuming a 20 percent down payment on a 30-year fixed-rate loan at an interest rate of 7 percent, you can afford the payments on a $240,000 home, according to Bankrate's mortgage calculator.
| Annual Salary | $40,000 | $40,000 |
|---|---|---|
| Mortgage Rate | 7.287% | 7.287% |
| Home Purchase Budget (25% monthly income on mortgage payments) | $103,800 | $114,900 |
| Home Purchase Budget (28% monthly income) | $109,500 | $127,600 |
| Home Purchase Budget (36% monthly income) | $141,100 | $159,300 |
If you can demonstrate an ability to repay the loan before you're 75 years old, they will consider your application no matter your age! For example, if you needed to borrow $300,000 and were 50 years old, the standard 30-year mortgage term could be reduced to 25 years and your loan would be approved.
Which is better 15 or 30 year mortgage?
A 15-year mortgage means larger monthly payments, but a lower rate and substantial savings on interest. A 30-year mortgage gives you a more affordable monthly payment, but expect higher borrowing costs overall. You can also take out an interest-only mortgage or pay your loan off early to maximize interest savings.
It will cost about 10–20% more to pay off a 30 year mortgage in 15 years than to take a 15 year mortgage and pay it off in that time. Generally, that's how much higher mortgage interest rates are on 30-year versus 15-year mortgages, about 10–20% higher.
A 30-Year Mortgage Term
The 30-year mortgage is the most popular mortgage offered in the U.S. because it spreads payments out over 30 years, making it more affordable, but you pay more in interest over time.
The 30-year mortgage is the most common home loan term in the U.S. Whether it has a fixed or adjustable interest rate, it gives borrowers 30 years to pay the loan off. Because the payment gets spread out over 30 years, this mortgage generally offers the lowest monthly payments.
A 30-year term normally has lower monthly payments than 15-year mortgages since your total mortgage balance is spread out over a longer period of time, resulting in smaller monthly payments. A shorter term means your balance is spread over a shorter period of time, making your monthly payments higher.
Reason #1: Your Retirement Plan Supports It
If choosing a 15 year mortgage would jeopardize your retirement goal, then you shouldn't go with the 15 year mortgage. Period! However, if your plan works regardless of the mortgage length, then it's perfectly acceptable to go with the 15 year option.
Make Biweekly Payments
This strategy can shave four to six years off a typical 30-year loan, depending on your interest rate. On a 15-year mortgage, biweekly payments may cut one to three years from the repayment time, depending on the loan amount and interest rate.
It can give you the ability to change the type of loan you have or use some of the equity you've built up in your home. If you're a homeowner looking to pay off your home sooner, refinancing can even allow you to change your loan term from a 30-year loan to a 15-year loan.
But in general, the cost of private mortgage insurance, or PMI, is about 0.5 to 1.5% of the loan amount per year. This annual premium is broken into monthly installments, which are added to your monthly mortgage payment. So a $300,000 loan would cost around $1,500 to $4,500 annually — or $125 to $375 per month.
The rule is no payments 30 days late in the past 12 months and no 60-day late payments in the previous 24 months. Timely payments count when it comes to getting rid of PMI. Late payments can put you in a high-risk category, making canceling harder.
What is a piggyback loan?
In a piggyback loan, instead of financing a home purchase with a single mortgage, you're doing it with two, which you take out at the same time: one big loan and a second, smaller one (the piggy on the back, so to speak). The second loan essentially provides funds towards your down payment.
In some regions with a lower cost of living, a $36,000 salary can provide a comfortable lifestyle and the ability to save for the future, making it a good income for your age. However, in high-cost-of-living areas, this salary might require careful budgeting to maintain the same standard of living.
That means you'd need to earn about $10,839 a month, or $130,068 per year, in order to afford a $400,000 home. Your actual take-home pay will depend on your state of residence, tax filing status, and other withholdings, Walsh says.
“Individuals with a salary of $75,000 a year should aim for a home price ranging from $150,000 to $225,000, which would yield a mortgage payment of $998 to $1,497,” said Miles, who cautioned to budget for costs beyond the loan itself.
The 28/36 rule dictates that you spend no more than 28 percent of your gross monthly income on housing costs and no more than 36 percent on all of your debt combined, including those housing costs.
