Choosing A 15- Or 30-Year VA Mortgage
The classic 30-year mortgage is the most popular — and most affordable — mortgage in America. About two-thirds of U.S. home buyers choose this option, according to the Mortgage Bankers Association.
But it’s not the only option.
VA lenders also offer a 15-year mortgage. These loans come with lower rates. But, since the loan is paid in full in just 15 years, the payment is higher.
So which one is right for you? Fortunately, it’s not difficult to find out whether a 15- or 30-year loan is best for you.
30-Year Loans Come With Lower Monthly Payments
The benefits and drawbacks of any home loan depend on the borrower’s financial situation, but in general, the main advantage of the 30-year mortgage is lower monthly payments. The main disadvantage? You’ll pay more interest over the life of the loan.
A 30-year mortgage on a $300,000 house at 4% interest breaks down to a monthly payment of $1,430, not including property taxes, insurance, or HOA dues. The monthly payment on a typical 15-year mortgage at 3.25% would be $2,100.
The 15-year loan comes with much higher payments. But lifetimes savings are significant.
If you got a 30-year mortgage on a $300,000 house at 4% interest, you’d pay $215,000 in total interest. A 15-year mortgage at 3.25% would cost less than $80,000 in total interest.
You’d ultimately pay $135,000 less interest over the course of repayment.
In this example, the total cost of the 30-year loan is almost three times as much as the 15-year term. On the other hand, the 30-year mortgage’s lower payments would let you save more money to achieve other financial goals like retirement, paying for college or creating an emergency fund. That’s the main reason the 30-year mortgage is so popular. Most homeowners don’t want to be “house rich and cash poor.”
Choosing “The Best” Mortgage: 15 vs 30 Year
Who’s best suited for a shorter-term mortgage? In my experience, it’s someone who’s made regular payments on a 30-year mortgage for a while — e.g., for 10 years or so — and wants to refinance to lower the interest rate from (say) 5% to 3.5%. A shorter-term mortgage may also be good for people who are retiring soon and want to pay off their debts beforehand. The shorter term can also be ideal for those who make large down payments and, therefore, have less principal and interest to pay back.
On the downside, the higher payments associated with shorter-term mortgages may force you to buy a smaller house (or at least a less expensive one). Say you want to buy a $300,000 house, and you’re already approved for a 30-year term. If you try to switch to a 15-year mortgage term, you may be disqualified because the higher monthly payments will push up your debt-to-income ratio. That’s something else to consider: you can often buy more house with a 30-year loan.
Trying to buy too much house is the biggest problem I encounter as a mortgage loan officer. Every day, I get calls from people who want to buy $400,000 or $500,000 houses, but can’t afford them. Maybe they can afford a $250,000 to $300,000 house, but the more expensive houses push their debt-to-income ratios through the roof.
The people best suited for longer-term mortgages are those who want enough disposable income to save for major life events, with enough left over to pay for everyday wants and needs. Especially if you’re a first-time homebuyer, keep in mind that closing on the property is not the end of the story. Afterward, you may need lots of income to buy furniture and pay for maintenance, repairs, or improvements. Don’t saddle yourself with such high monthly mortgage payments that you’ll have to pay for everything else with credit cards charging exorbitant interest rates.
The “Right” Loan Term Depends on Your Homeownership Goals
To select the mortgage that’s best for you, begin by defining your goals. What are you trying to accomplish? Do you plan to live in the house for decades, or is it merely a “starter house?” Is the house an investment that you plan to flip or rent? Is it likely that you’ll want to refinance?
Usually, when people plan to live in a house with their families, they want a 30-year mortgage. Knowing they’ll be there for a long time, they want a comfortable monthly payment. Conversely, an investor who plans on holding a property for just a few years might want an ARM (Adjustable Rate Mortgage) or a 15-year mortgage to minimize the total interest. On the other hand, investors might opt for the low monthly payment of a 30-year loan to avoid cash-flow problems when nobody is renting the house.
Create Your Own 15-year Mortgage
If possible, get a 30-year mortgage, but make extra payments or pay more than the minimum every month. In other words, get a 30-year mortgage, but treat it like a 15-year mortgage so you build equity and get out of debt faster. Of course, if you lose your job or need money for other purposes, reduce your payment back to the monthly minimum. (Before adopting this plan, however, make sure your lender doesn’t charge a prepayment penalty.)
In addition, be sure to identify and budget for the closing costs and fees attached to the loan you want. Typical fees include:
- Title insurance
- Recording fees
- Notary fees and origination fees (i.e., “processing fees”)
Depending on the loan term, these fees will collectively cost you from $3,000 to $5,000. The origination fee is usually the large single fee associated with home-buying, usually one percent of the total loan amount.
Shop for Today’s VA Loan Rates
Finally, it’s always a good idea to comparison shop. Before deciding on a particular loan and mortgage lender, have a look at the products offered by various financial institutions. Some lenders offer shorter and longer-term mortgages in addition to 30- and 15-year mortgages. Who knows? You might find that a 20-year mortgage — or a 10-year mortgage — is better suited to your lifestyle and personal finance strategy.