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The 15-Year Mortgage: Pros and Cons
If you’re thinking about buying a home with a mortgage loan, you may automatically gravitate toward a 30 year mortgage. These types of mortgage loans are, after all, the most common options for home buyers due to the low-interest rates, lower payments, longer term and other perks.
There are several other options aside from a 30-year mortgage, though. What you may also want to consider is the less popular 15-year mortgage loan, which is typically known for having significantly lower interest rates than the other types of mortgage loans. These types of loans are less popular than 30-year loans because you’re expected to pay your loan back in 15 years, not 30 — which can make them too expensive for some buyers. But while your monthly payment may be higher with a 15-year loan, there are also several benefits of a 15-year mortgage that may outweigh that one disadvantage.
Homebuyers who can afford to pay down their mortgage loans in half the time of a 30-year mortgage loan could save a lot of money in interest over the long run with this option. You’ll also be debt free in half the time — which is a huge perk for most people. So, before you make any decisions on your mortgage or refinance loan, you should explore 15-year mortgage pros and cons to see if it makes financial sense for you.
Benefits of a 15-year mortgage
A 15-year mortgage loan offers long-term benefits, including significant savings on the cost of your loan and a faster path to being debt-free. Some of the advantages you can expect from this type of loan include:
- Long-term savings. Your total mortgage cost will be much lower with a 15-year mortgage loan than it would with a 30-year loan. Interest rates are typically much lower for 15-year loans and you’re also paying the interest for less time, so you’re able to save significantly on the total interest for your loan. The result is more money in your pocket over the long run.
- Build equity faster. More of your payment will be going toward principal rather than interest if you opt for a 15-year loan, so you’ll build equity in your home much more quickly than you otherwise would. You can take advantage of this equity later in the form of low-cost financing. This includes options for a home equity loan, line of credit or a cash-out refinance.
- Refinance more easily. As you build your equity, you’ll have a lower loan-to-value ratio. A low LTV makes refinancing easier and you could even drop your private mortgage insurance quicker than expected.
- Become debt-free sooner. A 15-year mortgage cuts your mortgage payoff timeline in half. If you buy your house when you’re 30 years old, you could be debt-free by the time you’re 45 years old if you opt for this type of loan. With a 30-year mortgage, you’d be making payments on your home until you’re 60. Imagine the financial flexibility you could have in just 15 years time.
- Forced savings. The higher monthly payment acts as a kind of forced savings when you have a 15-year mortgage. People who are better at paying bills than cushioning their savings could benefit from the shorter payment term.
Cons of a 15-year mortgage
The possible perks of a 15-year mortgage are attractive, but there are some disadvantages to consider as well. These potential cons include:
- Higher monthly payments. You can expect to have much higher monthly payments with your 15-year mortgage. After all, you’re cutting your payoff time in half, and while more of that monthly payment goes toward your principal than it would with a longer loan, you still have a large loan to pay off. It’s important to shop in a price range that allows you to be comfortable with your monthly payment.
- Less affordable. A higher monthly payment can hurt other areas of your monthly budget, too. If you’re already feeling a pinch, a 15-year mortgage may not be worth the extra hardship in the short-term.
- Less money going to savings. Paying off a higher mortgage could cause you to be tight on money, which would mean putting less money into your savings or investment accounts. The money you save in interest on a 15-year loan could be less than what you would potentially earn by putting that extra money in either a high yield savings account or an investment account.
- May not qualify for as large a mortgage. Part of your home loan qualification depends on how much debt you carry each month compared to your income. You may not be eligible for as large of a mortgage with this type of loan, though it will depend on your other recurring debts.
- May impact eligibility for other types of loans. Your debt-to-income ratio also affects your qualification for future loans. With a higher mortgage payment, you’ll have less room for other types of financing you may need further down the road, like an auto loan, student loan or personal loan.
Is a 15-year mortgage right for you?
A 15-year mortgage loan can be an effective tool if you want to pay down your home loan debt faster and with less interest. That doesn’t mean it’s right for everyone, though. Before you decide to go with this type of loan, take a look at the price of homes that meet your needs and get an idea of the difference between both types of common loan terms: a 15 year vs. a 30 year fixed mortgage. This information will help you decide if the shorter loan comfortably fits into your budget or whether you would need to look at less expensive homes to make it work.
You should also consider your job stability. If you’re in an industry with strong growth forecasts and little turnover, a 15-year mortgage could make sense. If your industry isn’t that stable or your income is unpredictable, you may appreciate the lower payments of a 30-year mortgage.
It’s also wise to take a look at what your savings and emergency fund will look like after you’ve made your down payment. You never know what life will throw at you that could impact your earning potential, like an injury or illness, even with a seemingly predictable job or income. When considering a 15-year mortgage, you should have a hefty emergency fund that could cover your monthly payment and your other essential bills for at least several months.
If a 15-year mortgage doesn’t seem like the best idea right now, you have the option to refinance into this shorter loan term down the road. After you’ve paid down part of your 30-year mortgage loan, you could refinance to the more favorable 15-year loan terms. You could even make your payments on your 30-year loan as if you had a 15-year mortgage to gauge whether this loan term is feasible, which will also help you pay down your loan faster.
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