5 things to consider if you're choosing between a 15-year and a 30-year mortgage - CNBC

One of the most important parts of taking on a mortgage to buy a house is making sure the terms of the loan best suit your financial needs. Not only does this involve securing the lowest interest rate possible, it also means choosing the right mortgage term.

The mortgage term tells you how much time you have to repay your loan in full. The two most common home loan terms borrowers typically find themselves having to pick between are 15-year and 30-year mortgages, though some lenders will let you take on terms as low as eight or 10 years.

These 15-year and 30-year mortgages each come with their own advantages and disadvantages, so it's important to make the choice that's best for your financial goals.

Below, Select takes a closer look at the trade-offs of 15-year and 30-year terms on a home loan and what you should consider if you're choosing between them.

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Will the monthly payment fit into your budget?

Generally, the longer the life of your loan (or loan term) is, the lower your monthly payments will be. That's because borrowers repay their home loans in fixed, equal monthly payments over the entire life of the loan — someone who has a longer time horizon will end up with smaller payments compared to someone with a shorter time horizon for the same loan amount.

Rocket Mortgage, one of the largest home loan lenders in the U.S., uses an example of a $240,000 home loan with a 4% interest rate to illustrate this point. If the borrower chooses a 30-year loan term, they'll be making a monthly payment of $1,145.80 including principal and interest (insurance and other expenses are not included in this instance). If they choose a 15-year loan term, however, the monthly payment works out to be $1,775.25 — that's a difference of more than $629.45 a month.

If you anticipate not having enough wiggle room in your monthly budget to take on a higher mortgage payment, it could make more sense to go with a 30-year term so you can have smaller monthly payments stretched out over a longer time horizon.

Is your goal to save on interest?

One major drawback of having a 30-year mortgage is you'll end up paying more in interest over the life of the loan. Not only will you be charged interest for a longer period of time, lenders will typically also offer slightly higher rates for this option — the faster they can be repaid in full, the better, as the risk that you might potentially default on your payments will be smaller.

Some borrowers may be averse to the idea of paying more interest over time and may prefer to save on those charges by paying a slightly higher amount each month. If saving on interest is your biggest priority, a 15-year mortgage may be a better fit for you.

If you're looking to get a lower interest rate on your mortgage, make sure you also have a high credit score when applying and consider one of the best mortgage lenders as ranked by Select, like Rocket Mortgage and SoFi.

Rocket Mortgage

• Annual Percentage Rate (APR)

  Apply online for personalized rates

• Types of loans

  Conventional loans, FHA loans, VA loans and Jumbo loans

• Terms

  8 – 29 years, including 15-year and 30-year terms

• Credit needed

  Typically requires a 620 credit score but will consider applicants with a 580 credit score as long as other eligibility criteria are met

• Minimum down payment

  3.5% if moving forward with an FHA loan

Pros

• Can use the loan to buy or refinance a single-family home, second home or investment property, or condo
• Can get pre-qualified in minutes
• Rocket Mortgage app for easy access to your account

Cons

• Runs a hard inquiry in order to provide a personalized interest rate, which means your credit score may take a small hit
• Doesn't offer USDA loans, HELOCs, construction loans, or mortgages for mobile homes
• Doesn't manage accounts for jumbo loans after closing

SoFi

• Annual Percentage Rate (APR)

  Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included

• Types of loans

  Conventional loans, jumbo loans, HELOCs

• Terms

  10 – 30 years

• Credit needed

• Minimum down payment

Pros

• Fast pre-qualification
• Provides access to Mortgage Loan Officers for guidance
• $500 discount for existing SoFi members
• 0.25% price reduction when you lock in a 30-year rate for a conventional loan
• Offers up to $9,500 cash back if you purchase a home through the SoFi Real Estate Center

Cons

• Doesn't offer FHA, VA or USDA loans
• Mortgage loans are not available in Hawaii

Do you plan to tap into your home equity sooner rather than later?

Home equity is a measure of how much of the property you actually own. Think of it this way: When you take on a mortgage, you're making a down payment but paying the lender back for the loan they gave you to buy the house.

If, for example, you only make a 10% down payment on a $400,000 property, the lender essentially owns more of it than you do since you only paid for 10% of the home's value. As you continue to make your mortgage payments over the years, you'll eventually own more of the property than the lender does, which is how you build equity in your home.

Having a sizable amount of equity in your home can come in handy if you decide to take out a home equity line of credit, or a HELOC, for sizable renovations or other large expenses. You can also use the equity from your home through a HELOC to make a down payment for an investment property, so building up equity sooner can also help you reach certain goals faster.

The higher your monthly mortgage payments are, the faster you'll be able to build your equity — another reason why a 15-year mortgage can be more appealing to some borrowers.

How soon do you want to be mortgage-free?

One huge benefit when it comes to going for the 15-year loan term is you'll be able to pay off your house 15 years sooner than you would if you were to go with the 30-year mortgage.

Being mortgage-free means you'll have more room in your budget for other things — some homeowners may want to pay off their house as quickly as possible so they can purchase a second property and focus on paying off the mortgage for that instead.

Other people may just be emotionally uncomfortable with having debt and prefer to get rid of it as quickly as possible. Keep in mind that while taking on a 15-year term to be mortgage-free sooner can come with a slightly lower interest rate and more money saved on interest overall, you'll wind up having to make higher monthly payments as a trade-off.

Additional considerations

If you want to build equity faster and save on interest but can't commit to making higher monthly payments on a 15-year mortgage, you can try to make extra mortgage payments to help pay off the loan faster. This works best as long as your mortgage lender doesn't charge prepayment penalties for paying off the loan early.

If you're still a few years away from beginning your homebuying process, it can still be helpful to reach out to some mortgage lenders so you can learn more about the financial moves you need to make to be in an ideal position to buy your home.

For instance, if you really want to go with a 15-year mortgage but your current income won't allow you to make higher payments, a mortgage lender might suggest you save more money and get a higher paying job so you can afford to make them.

If you're still not sure where to start when it comes to finding a lender to work with, Select rounded up a few that cater to a variety of needs. Ally Bank, for example, doesn't charge lender fees, which can help borrowers save a bit of money upfront during the homebuying process.

Chase Bank, among other popular lenders, also offer a jumbo loan option for those who may need to borrow more than $647,000 to purchase their home.

Ally Bank

• Annual Percentage Rate (APR)

  Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included

• Types of loans

  Conventional loans, HomeReady loan and Jumbo loans

• Terms

  15 – 30 years

• Credit needed

• Minimum down payment

  3% if moving forward with a HomeReady loan

Pros

• Ally HomeReady loan allows for a slightly smaller downpayment at 3%
• Pre-approval in just three minutes
• Application submission in as little as 15 minutes
• Online support available
• Existing Ally customers can receive a discount that gets applied to closing costs
• Doesn't charge lender fees

Cons

• Doesn't offer FHA loans, USDA loans, VA loans or HELOCs
• Mortgage loans are not available in Hawaii, Nevada, New Hampshire, or New York

Chase Bank

• Annual Percentage Rate (APR)

  Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included

• Types of loans

  Conventional loans, FHA loans, VA loans, DreaMaker℠ loans and Jumbo loans

• Terms

  10 – 30 years

• Credit needed

• Minimum down payment

  3% if moving forward with a DreaMaker℠ loan

Pros

• Chase DreaMaker℠ loan allows for a slightly smaller down payment at 3%
• Discounts for existing customers
• Online support available
• A number of resources available for first-time homebuyers including mortgage calculators, affordability calculator, education courses and Home Advisors

Cons

• Doesn't offer USDA loans or HELOCs
• Existing customers discounts apply to those who have large balances in their Chase deposit and investment accounts

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

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