Better Deal: 30 or 15 Year Fixed Mortgage Rate?

As mortgage rates have hit record lows during the past few weeks, many people are beginning to look into the various options available to them. For those who are able to qualify, it is a great time to purchase a home or refinance an existing mortgage. With the 30 year fixed mortgage rate at 4.250% and the 15 year fixed mortgage rate at 3.750%, many are wondering which is the better deal: 30 or 15 year fixed mortgage rate?

Taking a look at the 15 year fixed mortgage rate which is lower than the 30 year fixed mortgage rate, the difference is usually only % to 1% . The actual savings comes from the shorter term and the amount of overall interest paid over the 15 years. The mortgage is paid in half the time with a large amount of interest saved during the life of the loan. Equity in the home also increases at a faster rate. On the other hand, when looking at the monthly payment of the 15 year fixed rate mortgage, the amount can be too much for the normal home owner to risk. In fact, many people who qualify for a 30 year fixed rate mortgage may not be able to qualify for a 15 year fixed rate mortgage. Although the interest rate is lower, the amortization of the loan makes each monthly payment higher since the term is shorter. While less interest is paid, there is a lower tax benefit at the end of each year. With standard deductions higher, many people are not even able to claim the mortgage interest tax deduction unless they have other items that warrant a 1040 long form income tax return. For those nearing retirement who are financially stable, having their home paid off makes the 15 year fixed rate mortgage more attractive. For those refinancing a 30 year fixed rate mortgage with an interest rate that is 2% or more higher than the current 15 year rate, the payment might actually be the same and, therefore, would be a good option. For example, a $100,000 15 years fixed rate mortgage at 3.750% calculates to a $727.22 monthly mortgage payment.

The 30 year fixed mortgage rate has always been the preferred loan. Even though the interest rate is higher, the fixed monthly payments are lower. Enough interest is usually paid each year so that the borrower is allowed the mortgage tax deduction on their income tax return. Financially, this can be a better option for borrowers. Home owners can make extra payments towards principal each month or as often as they wish. By doing so, the length of the loan will become shorter, equity in the home is built faster and less interest will be paid over the length of the loan. If for some reason, an extra principal payment cannot be made, the borrower just makes the regular payment that is due. It is the financial stability and available cash flow that attracts most people to the 30 year fixed rate mortgage. For the new home buyer, even if they can afford the 15 year fixed rate mortgage, the 30 year fixed rate mortgage is more practical because it will allow them to have available cash to perform upgrades or repairs. A $100,000 30 year fixed rate mortgage at 4.250% will warrant a monthly payment of $491.94 with the final payment in 2040. Making a $100 extra principal payment each month will cut 8 years off the life of the loan with a final payment due in 2032. Any time the extra payment cannot be made, there is flexibility as no penalty is attached to the borrower since it is completely optional.

There is no single or easy answer to determine the better deal: 30 or 15 year fixed mortgage rate. Each individual circumstance is unique and financial situations are different. When evaluating the differences, be conservative when calculating income and expect emergencies or other responsibilities to arise. Request a good faith estimate for each type of loan and compare the differences. Borrowers should choose the type of mortgage that they can realistically and comfortably pay off.