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15-year mortgages versus 30-year mortgages

Financial experts say borrowers should favor 30-year mortgages because the lower monthly payments allow them to direct some money into retirement accounts and have more cash on hand for repairs and unexpected emergencies.

On the other hand, a 30-year fixed-rate mortgage requires you to pay more out in interest over the term of the loan.

If you're interested in paying down your mortgage quickly and you have a substantial amount of money in liquid reserves, you may want to consider a 15-year mortgage.

A 15-year fixed-rate mortgage will typically have a lower interest rate than the 30-year product, but expect a much higher monthly payment.

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Bob Walters, chief economist at Quicken Loans in Livonia, Mich., says if you don't have at least a couple of years' worth of payments in cash reserves, you may not be the best candidate for a 15-year mortgage. The larger monthly payment often reduces the amount of money available to pay other debt, such as credit cards.

"I can't tell you how many times I've seen peoples' lives change when they lose their jobs and all of a sudden that 15-year payment is killing them," he says.

15-year mortgages versus 30-year mortgages
15-year mortgage30-year mortgage
Pros
  • Home equity builds up more quickly.
  • Interest may be tax-deductible up to certain IRS limits.
  • Lower interest rates.
  • More money is available each month for other investments and expenses.
  • When your financial situation allows, you can make higher payments toward principal with a 30-year mortgage and pay it off faster at your own pace, as long as the loan doesn't have prepayment penalties.
  • Interest may be tax-deductible up to certain IRS limits.
Cons
  • Less cash is available to pay other debts or to put into savings.
  • Job loss could mean consumers get into financial trouble easier with 15-year mortgage.
  • Higher interest rates.
  • You will pay a lot more in loan interest because of the increased term.
  • Equity builds more slowly than with a 15-year mortgage.

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