15-year or 30-year mortgage: Which is right for you?
Like conventional loans, VA loans are typically available to home buyers in increments of 15- or 30-year terms. In recognition of their service commitments, eligible military service members can benefit from the VA’s loan program.
This program affords active-duty service members, veterans, and surviving spouses a home loan with more favorable rates and terms compared to conventional loans. This is because a portion of the loan is backed by the federal government, mitigating some of the risks associated with conventional loans. Still, home buyers who purchase a home through the VA loan program will want to carefully consider the term on their loan as it will have a significant impact on their monthly payments.
Choosing the best loan type is unique to each home buyer’s financial location at the time of purchasing a house. Hero Loan is here to assist our military affiliate home buyers to strategically set themselves up for financial victory when it comes to making an informed decision on their monthly payments.
What are the Advantages of a 30-Year Loan?
More affordable monthly payments are generally why home buyers choose a 30-year loan term. On a month-to-month basis, this would seem to make the most sense. However, the cost of those lower monthly payments is conceding to a higher interest rate over a prolonged time period.
A 30-year loan term is viewed as riskier to lenders, resulting in higher interest rates to mitigate the chance of a borrower defaulting on their loan. For homeowners, this means you’ll be paying thousands back in interest over the life of the loan because of the higher risk resulting in higher interest. Furthermore, you’ll be paying that higher interest rate over a longer period of time which can make paying off your loan feel like financial quicksand.
The slow and steady strategy of lower monthly payments on a 30-year loan term means for homeowners that they will be making payments twice as long as they would compared to a 15-year mortgage. Fundamentally, calculating these terms on an equitable timeline creates a false equivalency between loan terms. With higher, prolonged interest rates and other fees, a 30-year mortgage will end up costing more than double the 15-year option over the full life of the loan.
So, what are the financial advantages of choosing to go with a 30-year mortgage term over a 15-year term? There is an opportunity cost tradeoff for some homeowners who choose the 30-year term option. Here are some reasons why a home buyer may decide to go with a 30-year mortgage plan:
- Affordability. While being able to make more aggressive monthly payments and own your home outright is the dream for many homeowners, those with a more modest income and assets rely on lower monthly payments to guarantee housing security.
- Stronger Purchasing Power. Lower monthly payments may act as a conduit for stronger purchasing power to buy more house than they would be able to afford with a 15-year loan. This is possible because the same lower monthly payment would allow the borrower to take out a larger loan over 30 years.
- Wealth Gains. Building wealth through investment opportunities may be part of a home owner’s plan of action towards financial freedom. If all of your cash flow is distributed towards monthly payments, the opportunity to build wealth through other investments becomes less accessible. Lower monthly payments free up funds to allow homeowners to build other assets and avoid the trope of putting all of their golden goose eggs in one basket.
- Secure Savings. Similar to wealth-building, homeowners will want to secure enough savings as part of a larger picture of financial independence. Allotting a portion of your income in a savings capacity is easier to accomplish with lower monthly payments.
Due to the cost-benefit analysis of paying higher interest rates over a longer term period, certain savvy financial advisors will argue that the 30-year fixed-rate mortgage is a financial dinosaur that should be put out to pasture. Clearly, for some homeowners, having a monthly payment that fits into a larger financial scheme makes the most sense for their own pecuniary needs.
What are the Advantages of a 15-Year Loan
Paying higher monthly installments on a 15-year term may seem like getting the raw end of the deal on a loan. However, by shortening the life on your loan, you are able to rid yourself of the principal, fees, and compounding interest on your loan more quickly, saving you thousands in house-related expenses.
These are the reasons why a 15-year loan term is a financially strategic position for homeowners who can afford the higher monthly payments:
- Significant Savings. Interest rates on a 15-year mortgage are lower compared to interest rates on 30-year loans. The average interest rate for a 30-year mortgage was around 0.5–1% higher than a 15-year mortgage for the past several years. In addition to paying a lower interest rate, homeowners will also be paying interest for less time over the life of the loan resulting in more savings.
- Expedited Debt Extrication. Because homeowners can pay off the principal on the loan more quickly with a 15-year loan term, they will be in debt for half of the time as compared to a 30-year mortgage. This means that homeowners are able to more readily free up their income, giving them peace of mind and an opportunity to make other financial investments.
- Faster Equity Gains. Equity is the value of your home at market value minus what you still owe on the principal balance. Most initial payments on a home go towards paying off the interest. By paying off that interest more quickly, homeowners can start paying off the foundation of their debt, the principal, in less time than is required on a 30-year loan. When your monthly payments will target the principal on your loan, as a homeowner, you will be able to build your greatest asset in a home, equity, more quickly. That equity can then be applied in a variety of ways like debt consolidation, home renovations, and other investment opportunities to put homeowners in a better financial position.
The downside of a 15-year mortgage term compared to a 30-year mortgage term is the financial exertion required each month required to pay higher installments. For some homeowners, this may mean that they can’t afford as much home as they’d like or they will be on a tighter financial budget with less flexibility to pay for other financial obligations. Each home buyer will need to crunch the numbers on their own to determine what works best for them financially.
Which Strategy is Better: A 15-Year Loan Term or a 30-Year Loan Term?
When it comes to mortgage terms, each individual home buyer’s situation is unique to their own financial location at the time of purchase. Depending on their personal economic situation, for some, paying off a loan with a 15-year mortgage is the most strategic route to getting in a better position financially.
For others, steadily making deliberate monthly payments within a larger scheme to pay off their loan over 30 years offers the best pathway to financial freedom. Plus, for homeowners with a 30-year mortgage who may find themselves in a more advantageous financial position down the road, there is always the option of refinancing to a 15-year mortgage term.
How Can Hero Loan Help?
Hero Loan recognizes the importance of strategic support when it comes to helping our dedicated military service members succeed in their home-sweet-home mission. We are firm believers in giving back to our community, and proudly support military-owned businesses and events in recognition of our appreciation for their invaluable service.
Our friendly lending experts would be honored to have the opportunity to sit and talk with you face-to-face to create a financial plan of action that will get you into the home of your dreams at competitive rates with more favorable terms. At Hero Loan, we want to help our military service members find a loan that puts them in a better position financially so they can truly feel the words “welcome home.”
Give us a call at (866) 222-1750 to further discuss how a 15-year or a 30-year term fits into your monthly payment plan. We are also available to chat online during our business working hours.