Whether you're a first-time homebuyer or considering a mortgage refinance in the Golden State, choosing the right type of loan is crucial. Two of the most popular options are the 30-year and 15-year fixed-rate mortgages. How do you decide which is best for you? This post breaks down the pros and cons of each to help you make an informed decision.
Benefits of a 15-Year Fixed Mortgage
Massive Savings in Interest
The most eye-catching advantage of a 15-year fixed mortgage is the incredible interest savings. Today's average rates in California are approximately 4.375% for a 30-year fixed and 3.375% for a 15-year fixed high balance conforming loan (loan amounts over $417,000). On a $600,000 loan, you could save an astounding $313,000 in interest with a 15-year fixed mortgage compared to a 30-year fixed.
Thinking of refinancing? Even if you've got a 30-year fixed mortgage at a seemingly low rate of 3.75%, switching to a 15-year fixed could save you around $235,000.
Pay Off the Loan in Half the Time
Another appealing feature of a 15-year fixed mortgage is that you can pay off the loan in half the time compared to a 30-year fixed. The reduced timeline and lower interest rates together contribute to your massive interest savings.
The Downside of a 15-Year Fixed Mortgage
Higher Monthly Payments
While the benefits are compelling, a 15-year fixed mortgage comes with its drawbacks. The most obvious one is the higher monthly payments. With our $600,000 loan example, the monthly payment would be $2,995 on a 30-year fixed, compared to $4,252 for a 15-year fixed—that's a $1,257 difference per month.
Income Requirements
To qualify for a 15-year fixed mortgage, you'll need a higher monthly income. Using the example above, your monthly income should be at least $11,450 for a 15-year fixed, while you'd need an income of just $8,650 to qualify for a 30-year fixed.
Lack of Payment Flexibility
With a 30-year fixed mortgage, you have the option to pay extra towards the principal. This flexibility can be beneficial if you run into financial difficulties. However, with a 15-year fixed mortgage, you're committed to the higher payment, leaving you with less financial breathing room.
And the Winner Is…
If you qualify for, and are comfortable with, the higher payments that come with a 15-year fixed mortgage, then the choice is a no-brainer due to the significant savings. However, the 30-year fixed mortgage offers more flexibility and could be a safer option if you're concerned about cash flow issues or meeting the higher monthly payments.
Final Thoughts: Consult a Loan Expert
Whether you're considering buying or refinancing, it's essential to consult a loan advisor to discuss your specific needs and circumstances. An expert can offer a detailed comparison between these two loan types to help you decide which is the best fit for you.
So, 30-year or 15-year fixed mortgage—which will you choose for your California home?