Compare 30 and 15 year fixed rate mortgages

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How do rates compare for a 30 year mortgage, and a 15 year mortgage? What would be the better option? What is the best mortgage rate for my situation, and should I consider getting a 30 year or a 15 year mortgage?

The answer to these fairly basic questions depends on your individual situation. Keep in mind that if you have an express interest in saving money on your home mortgage, you should very likely speak with a qualified lender or mortgage broker. Unfortunately, it is impossible to write for specific situations, but when you are comparing 30 year mortgages to 15 year mortgages, it might be helpful to have a comparison to go by. Mortgage rate comparison can be tricky due to the length of the loans involved, and it can be difficult to think in long-terms.

For starters, consider the bank's perspective on these loans. The banks exist as a corporation to make money. They are profit driven. Now, there is certainly nothing wrong with that! After all, without profit there would be no motivation what-so-ever for the bank to consider lending money for ANY loans, including a mortgage! Considering that the lending institution's interest in lending you money is so they can make money, the borrower can realize that ANY loan is (strictly speaking) a bad investment for the borrower. After all, profit means that the money has to come from somewhere. This money comes from the interest rates charged on your mortgage.

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So, let's put this in perspective: the bank expects to make money, of course. And, they also want to make a return on their investment (ROI) in as little time possible. The bank stands to make MORE money over the life of a 30 year mortgage, compared to a 15 year mortgage. But in some cases, it is considered more profitable to make a somewhat smaller profit in a shorter time-frame, as this profit can then be re-invested sooner in other loans. Effectively, the bank is willing to give up long term profit on your SINGLE loan, because the bank realizes that the short term profit is ultimately worth more, so long as it re-invested wisely in other loans.

With that in mind, there are two schools of thought when comparing 30 year mortgage rates to 15 year rates. From an investment perspective, it might make more sense to hold the loan for 30 years, and invest any money outside of regular payments into some other endevour (stocks/funds, savings, IRA) as long as those savings can return at a rate BETTER than the interest rate on your loan. Another perspective on the 30 year mortgage rate is that it allows the borrower more flexibility, because the payments will certainly be lower than a 15 year mortgage. These lower payments might allow the borrower extra money to pay other bills, OR, to "re-invest" in their home by paying more than the minimum owed. This strategy is great, because any extra principal you pay NOW, is interest that you do not owe over the entire LIFE of the loan.

Historically, the actual difference in rates between a 15 year mortgage and a 30 year mortgage are fairly slim (on average, .25%-.3%), but this does not change the fact that it IS a lower rate. If the borrower is certain they can pay the loan off in that short of time frame (15 years), it DOES make good sense financially to do so, as quickly as possible. Some might argue that you can make more money long term by re-investing the extra money from the lower payments on a 30 year mortgage into some lucrative, profit making investment. But this only makes sense if you can guarantee a return higher than the interest that you would save. This is somewhat of a gamble, and something that nobody can guarantee. Interest saved by "re-investing" back into your home's principle is a guaranteed savings for the life of the loan. You can also compare Home Equity Lines of Credit and Home Equity Loan rates if you do not want to refinance your entire mortgage. I chose a 30 year mortgage refinance to have the flexibility of a lower payment monthly (when things get a little tighter around the holidays), and over the course of the year pay an extra 15-20% each month. The principal savings mean that I will still save money long-term, have the loan paid off in 20 years instead of 30, and the best mortgage rates I could get on a 30 year mortgage might not beat those on a 15 year mortgage, but it is difficult to be able to guarantee that I can make the payments consistently on the 15 year mortgage. I came to my decision after talking to a local financial genius who helped me understand my situation better. Might be a good idea to consider speaking with a local broker or other financial expert if you have further questions.