While there are many different types of mortgages available in the market, the industry standard is a fixed-rate loan with a 30-year term. But 30 years may not always be the right term for every home buyer. Here will look at the pros and cons of a 30-year fixed-rate loan versus a 15-year fixed-rate loan.

Why did 30 years become the standard?

The history of the 30-year loan term is long. A century ago, the standard mortgage was three to five years with a balloon payment owed at the end. Standard practice when a mortgage was due was to simply get another loan and continue this process with smaller and smaller mortgages until the property was paid for. But with an incredibly high number of foreclosures taking place during the Great Depression, mortgage terms grew longer and longer. In the 1950s, the FHA adopted the 30-year mortgage and by the 1970s, Fannie Mae and Freddie Mac essentially cemented the 30-year term as a standard.

Advantages of a 30-year fixed-rate mortgage

The primary advantage of a 30-year mortgage is that your monthly mortgage payments are lower, which means you’ll have more financial flexibility each month and find it easier to make your payment when money is tight. The lower payment may also allow you to:

• Purchase a larger or more expensive house than you would be able to afford with a 15-year term
• Build up short-term and long-term savings
• Free up money each month for other expenses and financial goals

Advantages of a 15-year fixed-rate mortgage

Lenders typically see a 15-year term as a lower risk loan compared to 30 years, which means borrowers choosing a 15-year fixed-rate mortgage can get an interest rate between 1/4 and a full percentage point lower than they would for a 30-year home loan. This lower interest rate can save the buyer a lot of money. If you carry the mortgage to completion, choosing a 15-year loan means that you’ll have your home paid off in half the time. This benefit comes with the caveat that monthly payments are significantly higher with a 15-year term even if the total cost of the loan is much less.

It’s a personal choice

There’s no right or wrong decision when it comes to choosing the length of your mortgage. While a 15-year term will most certainly save you a lot of money, you might not be able to afford it or want to restrict your monthly budget with an expensive obligation.

It’s always a good idea to ask your mortgage broker to price out both 15-year and 30-year terms so that you can compare the differences and see if you can afford a 15-year loan. Most homeowners still choose a 30-year mortgage but don’t presume that you should simply because it’s become the standard.

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