30 Year Fixed vs. 15 Year Fixed – Which One Makes More Sense?
If you are planning to get a purchase or refinance loan in California, this post will help you decide between a 30 Year Fixed and a 15 year Fixed mortgage.
Benefits of a 15 Year Fixed Mortgage
Huge savings in interest cost: The biggest benefit of a 15 year fixed loan is the amount of interest you save. If you were thinking of getting a home purchase loan in California, today’s average rates are around 4.375% on a 30 year fixed and 3.375% on a 15 year fixed for high balance conforming loan (loan amount >$417,000, also called Conforming Jumbo loans). In such a scenario, you save $313,000 in interest cost with a 15 year fixed mortgage compared to a 30 year fixed. This is for a loan amount of $600,000. See chart below
And if you already have a 30 year fixed mortgage at a very low rate, say 3.75% and thought that refinancing didn’t make sense. Think again. With the same example, refinancing into a 15 year fixed can save you $235,000. (See chart below)
Pay off the loan in half the time: The other obvious benefit of a 15 year fixed loan is that you are able to pay off the loan in half the time. In fact thats one of the reasons (other than the lower interest rate) because of which the interest cost on a 15 year fixed is so much lower than a 30 year fixed.
The not-so-good news about 15 Year Fixed Loan
Should qualify with the higher payment: As can be expected, the payment on a 15 year fixed is higher than a 30 year fixed. For the first example above, the payment on a 30 year fixed is $2995.00 vs $4252.00 on a 15 year fixed, a difference of $1257.00 per month.
Everything else being same, you would need a monthly income of $11,450 to qualify for a 15 year fixed loan, while you will only need a $8,650.00 income to qualify for a 30 year fixed mortgage.
Mandated to pay a higher payment: On a 30 year fixed, you are required to pay a smaller payment with an option to pay extra towards principal if you can. On a 15 year fixed however, you are mandated to pay a higher amount. Even if you run into a financial problem or cash flow issues, the lender would still require you to make a higher payment. Refinancing into a 30 year fixed may not be possible at a short notice, especially if you have lost your job.
All these factors need to considered to be doubly sure that you are ready for a higher payment that comes with a 15 year fixed mortgage.
And the winner is – If you qualify for and comfortable with the higher payment of a 15 year fixed loan, its a no-brainer that it comes with gargantuan savings. Whether you are buying or refinancing, ask your loan consultant to show you the comparison between these 2 loans.
We at Arcus Lending always provide you with multiple loan options to help you decide which makes more sense for your financial goals.
You may also like to read – Fixed Rate Mortgage vs Adjustable Rate Mortgage