15-year mortgages are a desirable option due to their lower interest rates and faster payoff times. Find out how they compare to 30-year mortgages.
| 15-Year Mortgage Pros | 15-Year Mortgage Cons |
|---|---|
| Lower total cost of interest over the life of the loan | Less cash left over for investing, emergency funds, and other expenses |
| Builds home equity more quickly | Potentially smaller home buying budget |
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There’s a lot to think about when buying a house. When everything else feels so overwhelming, choosing between a 15- or 30-year mortgage may not seem like something you want to focus much mental energy on.
But in reality, it’s one of the most crucial choices you’ll ever make, one that will affect your financial situation for many years to come. In fact, for the rest of your life. That’s not hyperbole, it’s a fact.
Both have benefits and drawbacks, depending on a variety of factors, including how you see your career developing, whether you have children, whether you anticipate receiving an inheritance or other windfall, and how you intend to retire. The choice is even more important if you’re buying a home when you’re 10 or 20 years away from retirement.
You don’t need to be an expert in finance to figure it out. It’s simple to compare the benefits of 15-year mortgages and 30-year mortgages by comparing where you are now and where you want to be.
What Is a 15-Year Mortgage?
It’s a straightforward idea: 15-year mortgages pay off in half the time of the conventional 30-year mortgage, which is regarded as the “holy grail” of finance. Despite the fact that 30-year mortgages are still popular, some buyers of homes are choosing a 15-year payoff period.
The monthly payment on the shorter term could be painful if interest rates were higher because 15-year mortgages have much higher monthly payments than 30-year mortgages. However, historically low interest rates have increased the popularity of 15-year mortgages.
Low 15-year mortgage rates – averaging 3. 28% to 3. 44% in January 2020 – save money, and buyers who are eager to pay down principal quickly can frequently do so without going into debt.
Although every situation is unique and the advantages of a 15-year mortgage should be weighed against other factors, buyers who are interested in getting the best interest rate on a mortgage should strongly consider the 15-year option.
Pros and Cons of 15-Year Fixed Mortgages
30-year mortgages would quickly disappear if everyone could get a 15-year loan, but that hasn’t happened. 90% of homebuyers choose 30-year mortgages because of their low monthly payments.
However, those whose monthly expenses can accommodate a larger bite may prefer the advantages a 15-year mortgage can offer, such as low interest rates. Interest rates on a 15-year mortgage averaged 3. 28% to 3. 44% in January 2020.
15-Year Mortgage vs. 30-Year Mortgage
The three most important considerations to bear in mind when choosing between a 15-year and a 30-year mortgage are as follows:
Here is some math to show the differences: Take a $300,000 loan with a 30-year term and a 4% interest rate. The home buyer would pay $215,609 in interest if they made the required monthly payment for 30 years. In contrast, a similar 15-year loan with a total interest rate of 3 25% would be $79,441.
The rub comes in the monthly payment. Absent an escrow payment for taxes and insurance, the 15-year loan payment would be $2,108. Nearly half of the monthly payment on the 15-year loan, $1,432, would be due for the 30-year loan.
Though 15-year loans are increasingly popular as homebuyers weigh their benefits, 30-year mortgages still dominate. They provide long-term interest savings as a result of not making payments for an additional 15 years, and they assist in quickly increasing equity as you pay down principal owed on the loan.
When compared with a 30-year loan, buyers pay mostly interest each month in the first few years, leaving them with little equity in the home should they decide to sell it.
Comparing Mortgage Terms (e. 15, 20, 30 year)
A working person’s career typically lasts 30 years, so 15 years is a significant amount of time.
When deciding on the best mortgage for you, think about the future, especially what will happen after your working years are over and, if you have children, what your plans are for their future as well.
If you have a long career ahead of you, consider your expected income growth over time and whether you anticipate receiving an inheritance or other windfall. No matter what your age, retirement is also a factor. The choices regarding the length of your mortgage become more specific as you get closer to retirement.
If you’re deciding whether or not to get a 15-year mortgage, take into account these factors.
Do you plan to change jobs frequently to increase your income?, How much more do you realistically think you might earn during your working career?, Are you in a career that has steep income increases over the years, or does your field have small increases?
A 15-year mortgage might be the best choice if you are confident that your income will increase faster than your expenses because each year your mortgage payments will represent a smaller portion of your income.
There are advantages to a 15-year mortgage if you anticipate receiving a sizable inheritance or other windfall before the mortgage is paid off, but a 30-year mortgage may not be a bad choice either. Consider the amount you’re expecting, and when.
If you know you’ll inherit money to put into a retirement account, you might decide to take out a 15-year mortgage.
The 30-year mortgage option would save you money in the short term, and you could use the inherited funds to pay off most or all of the remaining balance.
A 30-year loan makes sense if you don’t anticipate a windfall and are unsure of how much your income will increase over time. Even if you are certain that a 15-year mortgage is a wise choice for you right now, things can change. Even the best-kept budget can suffer from the unforeseen events life throws at us, including job loss, illness, house fires, and family emergencies.
When that occurs, large payments that initially seemed manageable may instead prove to be a burden. Make sure you have a reserve fund for unanticipated expenses that will enable you to make your mortgage payments on time. If maintaining an emergency fund and making the higher monthly payments are out of your price range, you might want to choose a 30-year mortgage. Additionally, you can always take out a 30-year mortgage and then make extra payments to pay it off sooner.
Some people desire to pay off their mortgages prior to their kids attending college. That’s okay because it will remove a sizable expense from your budget at the same time that you will be incurring another sizable expense. However, keep in mind that there are other options, such as tax-free 529 savings plans, for saving for college.
With a 30-year mortgage, the smaller monthly payments might leave you with extra cash to put away in a college account that will eventually grow and earn interest.
While paying off your mortgage during your working years is important, saving for retirement is more crucial. And just like paying off a mortgage, saving for retirement is a long-term endeavor.
Never choose higher mortgage payments each month over a retirement plan. If you pay off your 15-year mortgage, you might have complete equity in your home. Although you could use a home equity loan or line of credit to borrow against that investment, you’ll have to pay interest on the money you borrow. Additionally, taking money out of a retirement account is simpler than taking money out of your house’s equity.
By choosing a 30-year mortgage, you might be able to contribute more funds to an IRA or 401(k), which will grow tax-free for years until you can withdraw them without incurring penalties.
Things become more difficult if you’re purchasing a home in your 40s or 50s. You might be able to pay off your mortgage before you retire with a 15-year mortgage. However, some retirees depend on the mortgage interest tax deduction, which is no longer available after the mortgage is paid off.
As you get closer to retirement, a financial planner can help you do the math and determine what’s best for you.
The Burden of Debt
The benefits of a 15-year mortgage make it the best option if you can easily afford the monthly payments, want to save on interest, and want to be debt-free. Savings are significant, but only if they don’t put a strain on your budget. Your mortgage shouldn’t impoverish you.
Make sure you are not giving up anything more crucial before choosing a 15-year mortgage so you can afford the higher payments.
Housing shouldn’t consume more than 30% of your monthly budget; this is a good rule to follow. Determine how much you can afford to pay for housing each month, and don’t go over that amount. If a 15-year mortgage is the best option for you, it will depend on the number you calculate while taking into account all the benefits and drawbacks.
Bill “No Pay” Fay has lived in poverty for his entire life. He started writing/bragging about it in 2012, helping birth Debt. org into existence as the site’s original “Frugal Man. The Associated Press, New York Times, and Sports Illustrated were just a few of the major publications for which he spent more than 30 years covering the high-stakes world of college and professional sports. Although his passion for sports has somewhat waned, he still feels strongly about never reaching for his wallet. Bill can be reached at [email protected].
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FAQ
Why is a 15-year mortgage not a good idea?
If your monthly payments are higher, it may be more difficult for you to make the payments when you are having financial difficulties, which could increase your risk of foreclosure. As a result, a 15-year loan carries a higher risk of foreclosure than loans with longer terms and lower required monthly payments.
Is it better to get a 15-year mortgage or a 30-year and pay it off early?
A 15-year loan might be a better option if your goal is to pay off the mortgage faster and you can afford higher monthly payments. On the other hand, a 30-year loan’s lower monthly payment might enable you to purchase a bigger home or free up cash for other financial objectives.
Is it smart to move to a 15-year mortgage?
A 15-year loan has additional advantages besides allowing you to own your home free and clear sooner, including: Less interest is paid: You’ll be paying your mortgage for half as long as you would with a 30-year mortgage. You’ll save money on interest because you won’t be paying it to your lender for those extra years.
Does a 15-year mortgage ever make sense?
A 15-year fixed mortgage can help you pay off your house faster and free up money for retirement if you can manage the higher monthly payment that goes along with it. Compared to a 30-year mortgage, you will pay less in interest over the course of the loan, and typically, a 15-year fixed mortgage means a better interest rate.