What is the best mortgage term to take?

By now, there’s little the Coronavirus pandemic hasn’t touched, and the mortgage market is no exception. Right now, mortgage rates (both for purchases and refinances) are at historic lows, thanks to the Federal Reserve Bank slashing rates in efforts to spur the economy after the slowdown brought on by the COVID-19 outbreak.

With today's low rates, it's no surprise mortgage refinances are soaring. Based on the current mortgage and refinance rates, it may be a good time for you to refinance, too. To see how much you could save on your monthly mortgage payment today, crunch the numbers and compare loan rates and mortgage lenders using Credible's free online tool.

Now that you have a sense of mortgage rates and whether you can save on interest over the life of the loan, you need to determine which loan term makes the most sense for your financial situation — whether you're a home buyer looking to secure your first mortgage or a homeowner considering refinancing into a new loan term.

What type of mortgage loan is best for me?

Whether you’re looking to buy or refinance, the question isn’t “is now the right time?” It absolutely is if you’re looking for the lowest interest rate you’ll ever likely see.

The question instead should be, “Is the 15-or-30-year mortgage right for me?”

SHOULD YOU REFINANCE INTO A 30-YEAR OR 15-YEAR MORTGAGE DURING COVID?

15 vs. 30-year fixed-rate mortgage

The obvious difference between a 15-year mortgage and a 30-year mortgage is the length of time over which you’ll pay back the loan. Which one is best for you depends on a variety of personal factors, including:

1. How comfortable you are with interest.
2. How much interest you’d like to pay.
3. How much home you can afford.
4. How quickly you’d like to be “mortgage-free.”

The 30-year term is the more traditional choice, but there are advantages to the 15-year mortgage, depending on your financial goals.

Pros and cons of a 30-year mortgage term

Pros

There’s a reason a fixed-rate, 30-year mortgage is the typical choice for both borrowers and lenders.

• It is less expensive each month to spread a home purchase out over 30 years
• You have a lower monthly payment
• There are lower qualification criteria (earnings and debt-income-ratio)
• Flexibility to pay back the loan faster if you’d like

Cons

However, there are some downsides to be aware of.

• You could end up paying more interest over the life of the loan
• Rates are often higher for 30-year mortgages For example, on a $250,000 home at 3.2% interest, the total paid in interest on the 15-year mortgage is around $65,000. The interest paid over 30-years on a $250,000 loan at 3.8% interest is over $100,000 more -- $169,361.62.
• For example, on a $250,000 home at 3.2% interest, the total paid in interest on the 15-year mortgage is around $65,000. The interest paid over 30-years on a $250,000 loan at 3.8% interest is over $100,000 more -- $169,361.62.

SHOULD YOU PAY OFF YOUR MORTGAGE EARLY?

Pros and cons of a 15-year mortgage term

There are some obvious advantages if you can afford to take on a 15-year mortgage term.

Pros

• You're paying as little interest as possible
• You can save more over the life of the loan
• You build equity in your home faster

Cons

But you should also be aware it's not always easy having a 15-year fixed-rate mortgage.

• You won't have as much money to spend on other needs
• Your monthly payments will be larger Using the example above with the same home price and interest rates, the 15-year payment would be $1,750 per month, compared to the 30-year payment of $1,164.
• Using the example above with the same home price and interest rates, the 15-year payment would be $1,750 per month, compared to the 30-year payment of $1,164.

HOW TO LAND THE BEST MORTGAGE AND REFINANCE RATES

A 30-year mortgage refinance term​

A 30-year mortgage refinance term is very much the same as a 30-year purchase mortgage, but with one major difference: when you refinance to another 30-year term, it starts the payoff clock over again.

If you bought in 2018, then refinanced in 2020, your payoff year would be in 2050, not 2048, but the monthly payments would still be lower on the 30-year refinance.

A 15-year mortgage refinance term

15-year mortgage refinances rates, however, are some of the lowest of the bunch. As of publication, the current 15-year fixed refinance rate is 2.5% compared to the current 30-year refinance rate which is half a percent higher at 3.03%.

Due to the lower interest rate and shorter payoff term, refinancing to a 15-year mortgage enables homeowners to build equity faster in addition to paying off the loan sooner.

But do not discount the hefty monthly payments that come with a 15-year mortgage. Not only is this less money available for spending and saving, but the higher monthly payments mean more income overall is necessary to qualify, putting a 15-year mortgage out of reach for many.

Is a 15-year mortgage or a 30-year mortgage better?

Ultimately, no one can definitively answer “is the 15-or-30-year mortgage better?” because it depends on so many factors unique to the individual borrower.

For those who want to save as much money on interest as possible and pay off their home sooner, the 15-year should do the trick. Consumers who want to achieve homeownership while having the flexibility to save for other goals like home repairs and retirement should opt for a 30-year term.

IS IT WORTH IT TO REFINANCE FOR 1 PERCENT?

And one final tip: the best way to determine what you’d end up paying in interest is to utilize an online mortgage calculator to do the math.