The 15-Year Mortgage: Pros and Cons
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A 15-year mortgage is the dream home loan for buyers who can afford higher monthly payments and want to pay off their mortgage in half the usual time. A 15-year timeline can save thousands or even tens of thousands of dollars in interest.
To make a 15-year fixed-rate mortgage work, you’ll need a reliable income and enough money left after your monthly payment to cover expenses, savings and emergencies.
What is a 15-year mortgage?
A 15-year mortgage will be paid off completely in 15 years if you make all the payments on schedule. These mortgages typically have a fixed rate, which keeps the principal and interest rate the same for as long as you hold the mortgage. Your taxes and insurance costs can change, though.
In 2018, lenders wrote nearly 22 times as many 30-year home purchase mortgages as they did those with 15-year terms, according to NerdWallet analysis of Home Mortgage Disclosure Act data. Among loans for nonmanufactured, single-family homes, 3.6 million were for 30-year terms vs. roughly 165,000 for 15-year terms.
“The monthly payment on a 15-year loan is typically much higher than that of a 30-year mortgage.”
No doubt many borrowers shy away from these shorter home loans when they learn the monthly payment can be more than 50% higher — around $2,017 a month for a 15-year mortgage vs. $1,318 for a similar 30-year loan, for example.
Consider the pros and cons of 15-year, fixed-rate mortgages to decide which home loan is best for you.
Benefits of a 15-year mortgage
Build equity faster
A 15-year fixed-rate mortgage, with its lower interest rate and higher payment amount, builds home equity faster because you pay down the principal balance quicker.
Shorter path to full homeownership
Owning a home free and clear is a goal that burns bright for many people. What matters most to them is a feeling of safety from knowing that their home is fully paid off.
Long-term savings
Lenders are exposed to fewer years of risk on a 15-year mortgage, so they charge a lower interest rate. Half as many years of payment also means you pay half as many years of interest. Let’s compare the principal and interest — not including homeowners insurance, property tax or private mortgage insurance — for a $250,000 mortgage with a 10% down payment:
A 30-year fixed-rate mortgage at 3.61% has monthly payments of $1,024 and a total interest cost of $143,719.
A 15-year fixed-rate mortgage at 3.13% has monthly payments of $1,568 and a total interest cost of $57,226.
That's a savings of $86,493 if you kept the loans for their entire term.
Disadvantages of a 15-year mortgage
Larger monthly payments
Monthly principal and interest payments for a 15-year fixed-rate mortgage run about 50% higher than on a 30-year home loan. You also have to pay property taxes, insurance and, if you put less than 20% down, mortgage insurance. This could make it hard to respond to emergencies and other needs. Even if numbers seem doable now, a mortgage is a commitment. Getting out means selling, refinancing or foreclosure.
If you're unsure that you'll always be able to make bigger payments, choose a mortgage with a longer term and opt to pay extra toward the principal each month. That way, you're still paying down the mortgage more quickly, but you aren't in hot water if there's a month where you can only make the minimum payment.
Opportunity cost
Using more money for monthly mortgage payments means it’s not available for other investments such as home improvements or capturing an employer’s matching contribution to a retirement account.
Tighter range of home affordability
The higher monthly payments for a 15-year mortgage mean you’ll qualify for a less expensive loan. That might mean buying a smaller house or forgoing your dream neighborhood. Stretching the loan over 30 years and keeping your payments low could give you more choices.
Is a 15-year mortgage right for you?
A 15-year, fixed-rate mortgage is a great tool for borrowers who can afford the higher payments while still saving and investing for retirement. Paying off a mortgage gives many people a feeling of independence, safety and accomplishment.
But if your income is uncertain or variable, avoid the 15-year mortgage. Ask yourself: What would happen if the payments become too much? Do you have a realistic plan to cope, or would you stretch your finances too far?
