In many circles today the 15-year mortgage is touted a good financial choice for homeowners who can afford to pay the much higher payments each month, and who want to get rid of their mortgage much faster. Potentially, 15-year mortgage rates today open up the door of opportunity for a borrower to save thousands in interest; in fact, if you qualified you could save six figures worth of interest on some loans with a 15-year product.
In 2018, banks and lenders are clearly marketing the 15-year loan as the best priced option. It is no secret that the 15-year mortgage rates are lower and of course the math doesn’t lie. If you save half a percent over 180 months, then you will save a significant amount of money in your pocket depending on the amount you originally borrowed. Let’s examine these present opportunities.
Online mortgage companies have pointed out the dramatic savings. For example, on the 15-year interest rate with an APR of 3.36% on a $300,000 loan the borrower would pay 2.124 a month (principal and interest) and $382,335 over the length of the fifteen-year term. When you compare the 30-year option at 3.89% APR the monthly payment would be less at $1,413 (principal and interest) but over the course of thirty -years, the borrower would be paying a total of $508,783. So with this example, the borrower could potentially save an amazing $126,448 by choosing the 15-year mortgage loan. It is always wise to compare 15 and 30 year mortgage rates before making a significant financial decision like buying a house or refinancing a mortgage.
But to make the 15-year mortgage a prudent choice, you need to have a solid monthly income and enough money left over after your payment to cover your savings, expenses and various emergencies.
The 15-year mortgage is not used that often; as of 2016, only one in six borrowers used a 15-year mortgage. Many borrowers shy away from a 15-year mortgage because the monthly payment can be up to 50% more than a 30-year mortgage payment. Whether it is a right choice for you will depend upon your circumstances.
Overview of the 15-Year Fixed Rate Mortgage
The major advantage of the 15-year home loan is you will be mortgage free after only fifteen-years. Most 15-year mortgages have a fixed rate, which will keep your rate and payment the same as long as you have the mortgage. But note that your taxes and insurance may change over time. Below are some of the other advantages of the 15-year mortgage:
- You will own your home yourself faster. Owning your home free and clear is a major goal for many of us. What matters the most to them is knowing their home is paid off.
- Build your equity more quickly with a 15-year home loan. You have a lower interest rate and a higher payment amount, so you will build your equity faster as you are paying down principal quicker.
- Save big. Lenders have fewer risks on a 15-year mortgage, so they have a lower interest rate. This could mean you may save .5% to .75% on a 15-year mortgage over a 30-year mortgage. Your loan is also cheaper because you pay interest for only half as long. To understand how much your savings are, compare the 30-year and 15-year mortgage rates in a side-by-side analysis: Research 15-year refinance rates.
Some of the Downsides of a 15-Year Mortgage Are:
- You will pay more each month. The monthly payment for your 15-year mortgage will be 50% or so more per month. You also need to pay like always your property taxes, insurance and mortgage insurance if you put down less than 20%. This can make it more difficult to pay for emergencies, such as a major car repair or a new roof. Even if you are sure the numbers are workable now, this could change in a few years, but you are stuck with the higher payment. You cannot get out of it unless you refinance.
- More home equity is in the home. It is good to build your equity faster, but all that money is locked into the home until you sell or borrow it. Some people prefer to pay the 30-year loan and invest the difference in high interest investments.
- You could be losing opportunity. Using more money to make your mortgage payments mean you do not have as much money available for other investments. You could earn a good rate of return in real estate investments and in the stock market.
- You cannot qualify for as much with a 15-year mortgage. If you get a home loan on a 15-year term, you need to show you have the income to pay the higher mortgage. This means you will not qualify for as much of a home as with a 15-year mortgage.
- You do not have as many tax advantages. You will lose the valuable mortgage interest deduction when you pay off the loan faster. Also, you will pay a lower amount of interest, so you cannot write off as much money on your taxes.
Should You Get a 15-Year Mortgage?
A fixed rate, 15-year mortgage is a useful tool for borrowers who have enough income to afford the bigger payment, and are still able to save money and invest for retirement. If you can still do those other things, you may want to get a 15-year mortgage loan. A lot of people place a lot of emphasis on owning their own home free and clear. Many people also are more comfortable going into retirement knowing they have their mortgage paid off. But if you are unable to save money for emergencies and invest for your retirement, you may want to think twice and stick with a 30-year mortgage.
Compare the 30 and 15-Year Rates Today: As a compromise, you can also get a 30-year loan and over pay on it as you are able to. You will have a higher interest rate, so you are paying more interest than a 15-year home mortgage. But by paying down your mortgage faster, you can enjoy many of the same benefits of the shorter-term loan, but you can make the lower 30-year payment when you need to.
Disclosures: ¹FICO: 740. Single Family Residence. $400,000 Value ($800,000 for Jumbo Loans). $300,000 Loan Amount ($640,000 for Jumbo Loans). Owner Occupied. Refinance. Zip Code: 07054 (1-30-18) The example does not include any origination or discount points. Please be advised that property taxes and hazard insurance premiums were not included in the payment example. Please be aware that no private mortgage insurance, (also known as PMI) was required in this example. 15-year home loans are amortized over a 180-month period.