The Differences Between 15-Year and 30-Year Mortgage Rates
An amortization formula can be a handy way to give homeowners an idea of how much they'll pay for a home, should they choose to hold it until the end of the mortgage. Find out more about how the interest rates work as the principal of the home is pared down and why it should matter to homeowners before they choose the length of their mortgage.
The Temptation of a New Home
New homeowners may be so excited to close on their dream property that they choose their mortgage based on low monthly payments. They may forget about how adjustable rates will affect them five years into the future or how much they'll be spending on interest over the course of three decades.
In certain cases, homeowners can be forgiven for this. Perhaps there's a once-in-a-lifetime opportunity or a last-minute property that must be sold quickly. However, for most people, using an amortization formula can make it easier to choose between a 15- and a 30-year mortgage, so owners can make choices they can live with both now and later.
How Amortization Formulas Work
An amortization formula is the best chance of knowing what the homeowner will pay over the lifetime of the loan. As the principal is paid off every month, the rate a homeowner pays will also change.
Amortization formulas take into the following:
- Type of loan
- Length of loan
- Interest rates
- Principal balance
Predicting the Future
In the case of a fixed-rate loan, it's fairly easy to work an amortization formula. One of the biggest reasons people choose fixed-rate is so they can budget for their investment well in advance. With an adjustable-rate mortgage, the situation becomes more difficult to calculate. Amortization formulas will take into account fluctuating interest rates over the course of the loan, but will do so based on historical averages. If there's a major change in the market and homeowners aren't prepared for it, an amortization formula will only help so much.
15- Or 30-Year?
Based on the principal of the loan and how interest is calculated, it's rarely ever recommended for homeowners to take their chances with a 30-year mortgage. A 15-year mortgage may require more upfront sacrifice, but that sacrifice is generally rewarded with thousands, if not tens of thousands in savings.
And while it may seem easy to absorb the costs over 30 years, owners should consider just how much money is going toward the property that could be going toward something else. Again, the most notable exception is for those who want to capitalize on a time-sensitive opportunity or those who know they won't be staying in the home for very long. (Parents who plan to move their children into a much bigger space may not necessarily need a higher upfront payment when they're only planning to leave soon.)
Amortization formulas can be difficult to calculate for new homeowners, especially when the upfront cost of a home is already so much. But as hard as it is to do the math before taking on the loan, it's much harder later on.