How 30 Year Loans Differ from 30/15 Mortgage Loans

“30/15,” or a 30-year mortgage payable in 15 years, is a type of balloon mortgage, meaning that the loan is amortized over a longer period of time than the actual term of the loan, but at the end of the term of the loan, the borrower is required to pay the remaining balance of the loan in a single “balloon” payment. In the case of a 30/15 mortgage, the loan is amortized as if it were a 30-year mortgage, however the actual term of the loan is only 15 years. After making payments for 15 years, the borrower must pay the remaining principal as a single balloon payment.

This type of loan can benefit some consumers for several reasons. First, interest rates on 30/15 loans tend to be slightly less than standard 30 year loans, making monthly payments a little lower. Also, if you are able to save enough money to pay off the balloon payment when it comes due, you can save a lot in interest, as you are only required to pay off the unpaid principal. Many businesses choose balloon loans when purchasing property, as the increased cash flow as the business grows allows then to pay the balloon payment when it comes due. The low payment provides flexibility while the business is growing, with the balloon coming due after the business has had time to grow. Another possible advantage of balloon loans is that if prevailing interest rates are lower when the fixed term ends, borrowers may be able to refinance their loans at a lower interest rate.

Unfortunately, predicting interest rates 15 years in the future is almost impossible, so the interest rates are just as likely to have increased as to have decreased when the balloon payment comes due.

If you are purchasing a new home, most financial advisors recommend a 30-year fixed-rate loan over a 30/15. Since most consumers will not be able to pay off the balloon payment when it comes due, they will be forced to refinance their loan. It is frequently better to lock in a rate and a payment that will stay the same rather than gambling on interest rates being lower when your 15 year fixed term ends on a 30/15. In most cases, the difference in interest rates offered on the two types of loans is not significant enough to have a major impact on the amount of your monthly payments.

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Bill

Bills.com