Takeaways
- A 15-year mortgage is a loan to purchase a home amortized over 15 years.
- For fixed-rate 15-year mortgages, your interest rate remains constant over the life of your loan.
- Choosing between a 15-year and 30-year mortgage depends on your financial situation.
- 15-year mortgages have higher monthly payments and require financial discipline.
- Homeowners who select a 15-year mortgage pay less in interest over the loan term.
One of the highest barriers to entry into the housing market is saving for a down payment. Once you have determined how much you need to save for a down payment, how much house you can afford comes down to the affordability of your mortgage payments. A critical factor for mortgage affordability is the term of your mortgage. The two most common term lengths are the 15-year and 30-year mortgages.
Choosing a mortgage with the best term length is critical. By selecting a 15-year mortgage, you can own your house in half the traditional timeframe and pay less interest expense over the life of your loan. However, there are many drawbacks to this term length as well. Let’s look at the advantages and disadvantages of a 15-year mortgage. However, before we do, let’s define a 15-year mortgage.
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What is a 15-year Mortgage?
A 15-year mortgage is a home loan designed to be paid over 15 years or 180 months. The monthly payments for a 15-year mortgage are higher than a corresponding 30-year mortgage. However, the interest rate is often lower compared to similar 30-year mortgages.
15-year mortgages can be a good option for those who wish to pay off their home quickly and save on interest costs. The shorter payment term means you can build home equity quickly, but it requires a commitment to a more substantial monthly payment. Higher monthly payments are better suited for disciplined financial planners.
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Advantages of a 15-year Mortgage
The 15-year mortgage can boost your financial well-being quickly. By scooping up home equity quickly and paying off your mortgage, you can put your money to use by investing. Here are six advantages of a 15-year mortgage:
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1. Faster Payoff
With a 15-year mortgage, you can own your home outright in half the time compared to a 30-year mortgage. Being mortgage-free can be a significant advantage if you want to focus on saving for retirement or have other long-term financial goals.
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2. Lower Interest Rates
Lenders often offer lower interest rates for 15-year mortgages, which means you will pay less in interest over the life of the loan [1].
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3. Build Equity Quickly
Since you are paying off the principal quickly, you accrue home equity in a short amount of time. Home equity can be advantageous if you want to remodel your house, sell your home, or refinance your mortgage in the future.
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4. Save on Total Interest
By paying off a lower interest rate for a shorter time frame, you will pay significantly less in total interest. Saved interest payments can be reallocated to add thousands of dollars into your savings.
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5. Predictable Payments
Most 15-year mortgages come with a fixed interest rate, providing stability and predictability in your monthly payments. Consistent fixed costs, like a mortgage, help you budget and plan for variable expenses.
6. Encourages Financial Discipline
The higher monthly payments required for a 15-year mortgage can encourage sound financial planning and discipline, aligning with long-term wealth-building strategies.
Disadvantages of a 15-year Mortgage
While the 15-year mortgage can encourage financial discipline and help you become mortgage-free, it also has disadvantages. Here are six disadvantages of securing a 15-year mortgage:
1. Higher Monthly Payments
A 15-year mortgage requires higher monthly payments compared to a 30-year loan for the same amount. Higher monthly payments can strain your budget, especially if unexpected expenses arise or you don’t have ample savings in your emergency fund.
2. Less Flexibility
The commitment to higher mortgage payments may reduce your financial flexibility. It might limit your ability to invest in stocks, save a slush fund, or contribute to your Roth IRA or Traditional IRA.
3. Potential Opportunity Costs
By directing more money toward your mortgage, you may miss out on other investment opportunities that could potentially yield higher returns over the same period.
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4. Qualification Challenges
Qualifying for a 15-year mortgage often requires a higher income and a better credit score. Not everyone may meet the criteria, limiting accessibility for some borrowers.
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5. Limited Cash Flow
The higher monthly payments can restrict your monthly cash flow, potentially limiting your ability to handle unforeseen expenses or take advantage of other financial opportunities.
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6. Potential for Overcommitment
While the idea of paying off your mortgage early is appealing, overcommitting to the shorter term of a 15-year mortgage might create financial stress if your circumstances change, such as job loss or health issues.
Is a 15-Year Mortgage Right for You?
Choosing a 15-year mortgage is a significant financial decision that requires careful consideration of your current overall financial situation, long-term goals, and risk tolerance. Here's how you can determine if a 15-year mortgage could be the right choice for you:
Assess Your Budget: Can you comfortably afford the higher monthly payments? Ensure that you have enough room in your budget to handle unexpected expenses without financial strain.
Consider Your Long-Term Goals: If paying off your home quickly aligns with your financial goals, such as retiring early or reducing debt, a 15-year mortgage may be a good fit.
Evaluate Opportunity Costs: Analyze other investment opportunities and determine if directing extra funds toward your mortgage is the best use of your money.
Understand Your Risk Tolerance: If you value financial stability and predictable payments, a 15-year mortgage may appeal to you. However, consider the potential risks of over-committing.
Consult with a Financial Professional: Speaking with a financial advisor or mortgage expert can provide personalized insights tailored to your unique financial situation.
A 15-year mortgage offers both rewards and challenges. By thoroughly evaluating the pros and cons and aligning them with your financial goals and lifestyle, you can make a more informed decision that supports your unique financial goals.
Smart Summary
Buying a home is one of the largest transactions you will ever make and getting ready to buy a home can take several years. Being financially prepared can change your home-buying experience. If you have an emergency fund, slush fund, and down payment, you can enjoy the home-buying process and focus on choosing the best neighborhood and size of home. When you are financially prepared, buying a home is fun and easy. Preparing for the transaction well in advance is a smart money move.
[1] FreddieMac. Mortgage Rates Decrease from Last Week While Remaining Above Seven Percent. Last accessed September 7, 2023.
