In a previous blog post, we discussed some of the different types of mortgage loans available to home buyers and homeowners in Washington. Today, we’ll zero in on the key distinctions between 15-year and 30-year fixed-rate mortgage products. Here’s an overview of the key features of these home loan options, as well as their pros and cons.
30-Year Fixed Mortgage: Most Popular Option
The most popular type of home loan in Washington State and nationwide is the 30-year fixed-rate mortgage. The majority of home buyers (and refinancing homeowners) choose this particular product.
Let’s break down its key features:
- 30-year: As its title suggests, this commonly used home loan has a repayment term of 30 years. During this period, this mortgage balance will amortize — or gradually reduce — until it is paid off fully. Of course, many homeowners sell or refinance their homes long before reaching the 30-year mark.
- Fixed-rate: This type of loan has an interest rate that remains the same or “fixed” during the entire repayment term, which is 30 years in this case. This feature distinguishes it from an adjustable-rate mortgage, or ARM, which does change over time.
According to a 2017 report from Freddie Mac, about 90% of home buyers were using the “standard” 30-year fixed-rate mortgage to buy a house. While the usage and popularity might have changed a bit since then, it is still the most popular financing option among borrowers in Washington.
15-Year Home Loan: Pros & Cons
You have options when choosing a fixed-rate type of loan. You don’t necessarily have to take it out for 30 years. Some borrowers choose to use a 15-year option instead of the more popular 30-year term. There are pros and cons to having a shorter repayment window.
At a glance: Choosing a 15-year (versus a 30-year) mortgage loan could save you a significant amount of money over the long term. That’s because you are paying interest for fewer years. Additionally, 15-year mortgages typically offer lower rates than their longer 30-year counterparts. The downside is that a 15-year loan would result in a higher monthly payment, since the repayment window is half the length.
So, should you use a 15- or 30-year fixed mortgage rates in Washington?
There are two main considerations here…
1. Consider the rate: On average, 15-year mortgages have lower interest rates than the longer 30-year loans. For example, when this article was published in April 2018, the average rate for a 30-year fixed mortgage in Washington and nationwide was 4.47% (source: Freddie Mac). At the same time, the average rate assigned to 15-year home loans was 3.94%. It’s common to see this kind of spread between the two products. Borrowers can often secure a lower rate by choosing the shorter-term mortgage product.
2. Consider the payments: A borrower who chooses a 15-year mortgage loan instead of the more common 30-year option will end up with higher monthly payments (with all other things being equal). When there are fewer years to repay the loan, the size of the monthly payments will increase. As a result, the 30-year fixed mortgage is more popular with Washington borrowers who want to minimize their monthly payments — and that’s most borrowers.