15-Year Mortgage. Are They Right for you?
A 15-year mortgage is one of the cheapest options available to lenders, offering a host of benefits for anyone who can afford to take it. The problem is, very few first-time buyers can afford the higher monthly payments demanded by these mortgages and even repeat buyers tend to turn their backs on them, opting instead for a more traditional 30-year mortgage.
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In this guide, we’ll look at the options available for a 15-year loan and see how it compares to a 30-year loan, seeing what the pros and cons of this mortgage are and whether or not 15-year mortgage rates are worth the potential pitfalls.
Pros of a 15-Year Mortgage
The main benefit, and really the only benefit to a 15-year loan is you will pay less interest over the term. The actual interest rate doesn’t need to change, nor does the amount you pay. Simply by reducing the loan term from a 15-year term mortgage to a 30-year one, you can greatly reduce the interest you pay.
As an example, imagine that you’re offered a 30-year mortgage at a cost of $200,000 with a 5% interest rate. Every month you will pay $1,073 and during the life of the loan, you will have repaid in excess $386,000, more than $186,000 of which is pure interest.
By dropping to a shorter-term of just 15-years, you will pay $1,581 a month, which is substantially more, but at the same time, the total interest will be a fraction above $284,000.
That’s a reduction of more than $100,000 in total interest, and it doesn’t stem from a low-interest rate, a reduced loan amount or an increased down payment—everything stems from a change in the length of the home loan.
Cons of a 15-Year Mortgage
The biggest issue with reducing the term on your mortgage loan is the additional monthly cost. $1,581 is a huge sum of money to find every month. It’s a sum that the average householder will struggle to afford and that’s important, as it’s average householders that we’re talking about here.
After all, the average house price in the US is just over $231,000, which means many Americans are securing mortgages for around $200,000 and facing the possibility of paying more than $1,500 a month if they want a shorter loan.
Even if you convince yourself that you can afford it, making a few sacrifices here and then, cashing in your savings, etc., you’ll also have to convince the lender.
The lender may insist on a longer-term if your debt-to-income ratio and credit score suggest that you’re not a good fit. Affordability is key, and if they are in any doubt that you can’t meet the monthly mortgage payments, they won’t offer you such a short term.
A shorter-term loan is always a great option, but it’s not one that you need to take right now. If you can only afford a low down payment and you can’t get on the housing market for anything less than 30-years, maybe that’s the best option right now.
Once you have the house, you can start to build equity, improve your FICO credit score, pay off credit card debt and other obligations, and eventually, when you’re ready, you can refinance.
Refinancing is available to all homebuyers and allows them to take advantage of an improved financial situation to secure a better annual percentage rate by whatever means necessary.
Once you have cleared more of that balance and secured more home equity, you can spend more time building and improving and then, a few years in, you’ll have even more options, including secured loans, reverse mortgages, and home equity loans.
How to Save More Money on a 15-Year Mortgage
Whether you have a fixed-rate mortgage or an adjustable-rate mortgage; whether it lasts for 15 years or 30, there are numerous ways you can reduce the monthly payments and total interest. Here are some tips to keep in mind before you sign on the dotted line:
- Compare: First time home buyers can save huge sums of money by doing some simple comparison searches. Compare multiple mortgage lenders, check the amount of interest they’re charging and see what mortgage products are offered.
- Look at Different Types of Loan: From VA loans to FHA loans, Jumbo loans, and more, there are many types of mortgage loan available and each loan type offers something different, from a lower interest rate to a less demanding down payment requirement. Check which ones you qualify for and apply for the one that best suits your needs.
- Increase Down Payment: A larger down payment means you’re borrowing less money from the lender, which in turn will reduce the total interest that you repay and also reduce your monthly payments.
- Improve Your Credit Score: Your credit score counts for a lot and can have a massive impact on your finances and your chances of getting a short-term mortgage, or any mortgage for that matter.
Is It Right for You?
If you meet any of the following requirements, a short-term mortgage might be a good fit for you:
- You have a high down payment
- You have a lot of spare money at the end of the month
- You’re buying a much cheaper house than you can afford
However, if you’re getting an expensive home and your monthly payments will push you to your limit, it probably isn’t the best choice. Your mortgage payment could increase by half, stretching your finances thin.
You might think you can afford it and you might have even done the sums, but just because you have a little extra cash now doesn’t mean you will have that cash on hand throughout the 15-year period.
What’s more, many borrowers overlook application fees and monthly expenses like loan origination fees, closing costs, mortgage insurance premiums, property taxes, and more.
Take a look at our Mortgage Calculator to check your affordability and run a few basic calculations to see whether a short or long term is right for you. This is also something you can discuss with your mortgage lender, mortgage broker, and financial advisor, all of whom can advise on the best course of action based on an analysis of your finances.