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Mortgage Term Options: 15 or 30 Year Mortgage?

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15 vs 30 Year MortgagesOf the two mortgage term options, is the 15 or 30 year mortgage period better? These are the two common periods over which people choose to pay their mortgages in, so what is the difference? Obviously, the longer you take to pay, the less your monthly repayments will be, but what are the pros and cons of repaying a loan over a shorter or longer period?

Irrespective of the words used to describe it, a home loan is a loan just like any other. However, mortgages usually have the advantage of lower interest rates and the interest payments are usually tax-deductible for a normal family home. Here are some pros and cons of each.

The 30 Year Mortgage Period

The vast majority of mortgage terms are 30 years. This generally means that it will take 30 years to repay the loan. It does not mean that you pay the same interest rate for these 30 years, because 30-year adjustable-rate mortgages can be arranged with a lower rate for the first 5, 7 or 10 years, say. The rate is then adjusted to the standard at the time the fixed rate period ends – that could be a higher or lower rate.

However, that is all irrelevant to the discussion between 15 and 30 year mortgages.  If you intend to stay in your home and pay the mortgage off in 30 years then a fixed rate gives you more stability. Your repayments are lower than with a 15-year mortgage, and you can:

•    Be offered a mortgage that you would not be given over 15 years
•    Afford a home you could not repay over 15 years
•    Have more spare cash each month for improvements to increase its resale value
•    Sell your home at a profit to use as a deposit on a larger home with the same monthly repayment over what is left on the initial 30 years

The negative aspects of this longer mortgage term are that you are tied into 30 years of repayments, and may have potentially high early settlement costs. Check the cost of early settlement of your outstanding mortgage so you are aware of the situation should you sell up and want to clear your mortgage loan.

The 15 Year Mortgage Term

Some people prefer to take a mortgage over 15 years. By doing this they will make higher monthly repayments, but will pay less interest over the period of the loan. They will also own their home outright in half the time. You also build equity in your home faster, so you will find it easier to refinance if you wish to, or make more when you sell it to upgrade.

Depending on their statutory retirement date, elderly buyers may be restricted to a 15 year mortgage term. Few lenders will offer a mortgage running past retirement date unless there are specific reasons for doing so.

With a 15 year term, the mortgage will be amortized over the entire 25 years with a fixed rate of interest. You will know exactly what you are paying without the worry of rates increasing above an affordable level. Among the advantages of a fixed rate 15 year mortgage are:

•    Same payment every month for the entire 15 year mortgage period
•    Your home paid for sooner
•    Quicker increase in equity
•    Same mortgage available to 50 year olds as for 20 year olds depending upon your type of job
•    Less overall interest paid

Which is Best for You?

The above mortgage term options may or may not fits your needs, depending upon your personal financial situation. A 30 year term might enable you to buy a larger home – or might even be necessary to buy a home at all!

The main differences between a 15 or 30 year mortgage are that a) You can buy a larger home or pay less each month over 30 years, but b) you can own your home 15 years sooner over a 15 year mortgage term. There are alternative mortgage term options but these are the most common.

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