When it comes to financing, a mortgage is one of the biggest investments someone will make. Getting qualified is one thing, but landing the perfect mortgage with the best terms is the next step. Which one is better? A 15-year or 30-year fixed rate loan? Whatever you choose, figuring which one best suits your financial situation before applying is the best practice.
What’s Your Debt-to-Income Ratio?
When applying for a new mortgage home loan, one of the first things the lender looks at is your credit score and debt-to-income ratio. If the ratio of debt you owe is high, or higher than 43% of your income, and your credit or FICO score is low, the interest rate will be higher. This means the payment will be higher for either choice but a 30-year term may be lower than a 15.
Keep in mind lenders won’t approve the loan if your monthly mortgage payment is too high. So the choice may be out of your hands. Before getting a mortgage, no matter what the loan term is, try to pay down as much old and active debt as possible.
Longer Terms, Less Payment Make Other Goals Easier to Achieve
You also need to consider your financial goals. Are you starting a new nest egg or adding more funds to an existing one? Either way, having a 30-year loan term will leave more money available for things like savings and retirement funds. But it does mean being saddled with the loan for a longer period of time, and therefore, paying a lot more in interest.
Higher Payment = Shorter Term
Choosing a 15-year mortgage means your payment will be higher but for a much shorter period of time. This can be a good option because it means less interest is paid out to the bank — but what’s your cash flow? Do you have a reliable income? If the higher payment won’t break the bank each month and it’s affordable for your household, go the 15-year route to keep more in your pocket in the long-term.
Keep the 30-Year Plan, but Make It a 15-Year Goal
If funds fluctuate or the household expects to have occasional setbacks, having the higher payment may be too risky. Instead, treat the 30-year loan as if it were a 15-year one. Pay double principal each month, or as often as possible. The interest rate of the 30-year plan is still in place, but it’s possible to pay it off much faster.
Taking a close look at your financial situation along with other factors is the best way to make the right mortgage choice. Ask a financial advisor rather than a loan officer for the best advice.
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