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A 15-year mortgage is the dream home loan for home buyers who can afford the much higher monthly payments and want to shred their mortgage in half the usual time while saving thousands or even tens of thousands of dollars in interest.
To make a 15-year mortgage work, you’ll need a reliable income and enough money left after your monthly payment to cover expenses, savings and emergencies.
Only about one in six borrowers of conventional mortgages have used a 15-year mortgage this year, as of November 2017. No doubt many borrowers shy away from the shorter home loans when they learn that it requires a payment that’s about 50% bigger — around $1,650 a month vs. $1,100 for a similar 30-year loan, for example.
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 interest rate and payments the same for as long as you hold the mortgage. Your taxes and insurance payments can change, though.
Read on for a look at the pros and cons of 15-year, fixed-rate mortgages and guidance on who should and should not consider one.
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.
A 15-year mortgage, with its lower interest rate and higher payment amount, builds equity faster because you pay down the principal balance quicker.
Lenders are exposed to fewer years of risk on a 15-year mortgage, so they charge a lower interest rate. “That could mean, depending on the institution, a rate that’s anywhere from a half percent to three-quarters of a percent lower than for a 30-year, fixed-rate mortgage,” says Carlos Miramontez, vice president of mortgage lending at Orange County’s Credit Union. A 15-year mortgage also is cheaper because you pay interest over half as many years as with a 30-year mortgage. Compare the principal and interest — not including homeowners insurance, property tax or private mortgage insurance — for $250,000 mortgages at current interest rates:
A 30-year fixed-rate mortgage at 3.88% has monthly payments of $1,176 and a total interest cost of $173,471
A 15-year fixed-rate mortgage at 3.19% has monthly payments of $1,749 and a total interest cost of $64,890 — a savings of $108,581 if you kept the loans for their entire terms
Monthly payments for a 15-year 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 for borrowers to respond to emergencies and other needs. Even if numbers seem doable now, this is an ironclad commitment. There’s no escape except selling, refinancing or foreclosure.
Because you are building equity faster, more of your money is tied up in a pool of savings that you can access only by selling the house or borrowing with a HELOC or home equity loan.
Using money for mortgage payments means it’s not available for other investments — a higher return on stock investments, for example, or capturing an employer’s matching contribution to a retirement account.
The higher monthly payments for a 15-year mortgage mean you’ll qualify for a less expensive property than if you’d stretched the loan over 30 years and kept your payments low.
A 15-year mortgage has two tax disadvantages:
You lose the mortgage interest deduction sooner when you pay off the loan in half the usual time
The lower rate on a 15-year loan reduces the amount of interest paid compared with a 30-year mortgage. Less interest means a smaller mortgage deduction, says Larry R. Frank Sr., a Roseville, California, certified financial planner.
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 and safety.
“The 15-year has become more popular for those folks whose goal is to own the home free and clear or have debt reduced by a certain time,” Miramontez says. His customers typically use it to refinance, aiming to become debt-free by retirement or free up cash flow for remodeling or to help adult children pay off student loans or buy a home.
But if your income is uncertain or variable, avoid the 15-year mortgage, Frank advises. 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?
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