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The home buying process can be confusing, but...
“Should I choose a 15 year or a 30 year VA mortgage?”
This is a common question consumers ask. And rightly so because the amortization period — the period in which the loan is completely paid — affects not just the monthly payment but also the amount of interest paid over the life of the loan.
Continue reading to learn more about how to choose between a 15 year and a 30 year VA mortgage.
Do you want to speak with a VA loan expert about the options available? Please give us a call at 888-775-1585 or fill out our online contact form and we’ll be happy to answer any questions you may have.
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Understanding the Amortization Period
When deciding between a 15 year VA mortgage or the 30 year, take into consideration not just the monthly payments but also the affordability. Let’s look at the difference an amortization period can make.
Take a loan amount of $250,000 and a hypothetical 15 year VA mortgage rate of 3.75%. The result is a monthly principal and interest payment of $1,818. Now, take the same loan amount with a similarly priced 30 year VA mortgage at 4.00%. That would bring the monthly payment to $1,193.
Note that for all of the illustrations, we are talking about monthly principal and interest payments only. Your actual payment will be greater thanks to escrow for property taxes and insurance.
The difference in monthly payment is $625. That’s a lot. You’ll notice that a 30 year VA mortgage rate will always be a bit higher than a 15 year fixed rate, but not by much. That’s how lenders price their loans; a 15 year VA mortgage will usually be about ¼% lower than a 30 year VA mortgage.
Many veterans choose a 15 year VA mortgage over a 30 year due to the amount of interest saved over the life of the loan. Using the same example shown above the 15 year loan yields just over $77,000 in mortgage interest. The longer term 30 year VA mortgage? Almost $180,000!
The difference in interest savings for a 15 year and a 30 year VA mortgage is a whopping $111,000! So why doesn’t everyone take the 15 year loan term?
Qualifying for a 15 Year VA Mortgage
Higher monthly payments mean it requires more monthly income in which to qualify for a 15 year VA mortgage. Yes, the payments are lower for the 30 year loan but even if you wanted the 15 year mortgage it would take more monthly income before a lender would approve you. In this example, the 15 year VA mortgage would require almost 2/3 more gross monthly income in order to be approved.
That’s why the 30 year mortgage is much more common than the 15 year mortgage. The 15 year VA mortgage may make more sense financially with regard to interest savings yet the 30 year VA mortgage allows you to buy more “home” with lower payments.
But the choice is not always so “black-and-white.” There are more choices than just the 15 year VA mortgage and the 30 year but most consumers aren’t aware of them. Maybe neither 15 year nor 30 year mortgage is the better option.
Why not something in between?
The 15 year VA Mortgage and the 20 year and 25 year VA Mortgage
Lenders can typically offer fixed rate mortgage amortization periods in increments of five years. So instead of a 15 year loan with the higher monthly payments, what about a 20 year? Or even a 25 year?
That’s right. They’re available at your VA lender but you have to ask for the additional options. In fact, some loan officers may not even be aware of these additional loan terms.
So what do the different loan terms look like? Again, using the same loan parameters, a 20 year loan at 3.75% and a 25 year loan at 4.00% look like this:
20 year fixed rate = $1,482 per month
25 year fixed rate = $1,320 per month
And the interest paid over these additional loan options?
20 year fixed rate = $105,680 interest paid
25 year fixed rate = $145,700 interest paid
Historically, choosing between a 15 year and a 30 year VA mortgage led most to select the 30 year option with the lower monthly payments and easier qualifying. However, there are additional choices that may just combine the best of both worlds…easier qualifying and less interest paid over the life of the loan.
Contact Us Today
If you’re trying to select the VA mortgage option that best suits your household and eligibility requirements, then get in touch with us today. We will explain the options available to you and let you know what may make the most sense. You can call us at 888-775-1585 or you can fill out our online contact form to get started.
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