Quite simply, a 30-year amortization period means the entire loan is structured to be fully paid off in 30 years. This essentially amortizes (repays) the principal over 360 monthly payments, so naturally the amount of principal repaid to the lender is less under this scenario than if one uses a faster 15-year payback option.
Traditionally U.S. consumers have selected a 30-year mortgage, however the 15-year mortgage has grown in popularity due to less total interest being paid over the term of the loan. Mortgage payments on a 15-year loan are higher, but many homeowners feel the need to clear off this debt as quickly as possible.
What are the advantages of a 15-year mortgage?
- Less interest is paid
- Interest rates are lower
- Loans pay off faster
- Shorter loans mean avoiding negative equity
- Paying off a mortgage sooner leaves peace of mind
- Mortgage insurance is cheaper
What are the disadvantages of a 15-year mortgage?
- Higher mortgage payments
- Loan defaults are more common, although some lenders may agree to switch to a different term to avoid foreclosure
- Higher returns from investing the extra money elsewhere
- Less money available each month for other expenses
Every financial situation is different. The 15-year mortgage offers both pros and cons, so always check with your financial advisor for the best advice for your particular needs. A free amortization schedule in Excel spreadsheet format is available here as a zip file.
