The long-term advantage of a 15-year fixed-rate mortgage is that it’s cheaper than other mortgage options. However, monthly payments are higher.
- Interest rates are generally lower on 15-year mortgages compared with 30-year loans;
- And borrowers pay off the loan faster, so less interest overall is paid.
“Borrowers will generally secure a lower interest rate on a 15-year mortgage than a 30-year mortgage. Because they are paying down the loan more quickly and have a lower rate, these borrowers will pay significantly less interest over the life of the loan,” says Rick Bechtel, executive vice president of U.S. residential lending for TD Bank. “This long-term savings make a 15-year loan an attractive option for borrowers who can manage a higher monthly payment.”
Pros and Cons of a 15-year mortgage
Here we’ll look at both the positive and negative aspects of the 15-year mortgage, so you can see how it fits into your financial goals.
PROS:
- The interest rates are usually lower.
- You’ll make fewer payments (180) than you would with a conventional 30-year mortgage (360), which means less total interest paid.
- You’ll pay off your mortgage faster.
- You can build equity more quickly.
Historically, interest rates on 15-year mortgages fall below other mortgage options, making it a nice boost to your bottom line. A quick check of the current mortgage rate table will show you how much you can save by getting a 15-year home loan versus other loan types.
Fewer payments mean less overall interest. Even if you got the same rate on a 15-year fixed-rate mortgage as you did on the 30-year fixed-rate mortgage, you would still pay less in interest because your payments end 15 years sooner.
For many folks, paying of their mortgage is a cause for celebration. It’s one less bill and now you own your house free and clear, which can be a mental relief as much as a financial one.
Because you’re paying down your principal in half the time you would a 30-year mortgage, you speed up the equity-building process. Equity is basically how much of the home you own. For example, if you owe $150,000 on a home that cost you $300,000 and today that home is worth $360,000, you have $210,000 of equity in that house — the bank has the rest.
CONS:
- You pay more each month.
- Your money is locked into your house.
- You’ll qualify for a lower mortgage amount.
For many people, the larger monthly payment is the main impediment of 15-year mortgages. You repay a larger portion of the principal each month than with a 30-year loan.
Depending on your budget, spending too much on a monthly mortgage can leave less available for other investments, which might be more lucrative. For example, it might be more financially sound to direct the extra money on your retirement savings or a high-yield savings account (in case of emergencies) than putting so much of your cash in a house. Talk to your financial adviser about your options and financial goals before you commit to larger monthly payments.
Lenders want to make sure you can comfortably afford to pay them back, so if you max out your budget with a 15-year mortgage then they’ll likely lend you less money.
Historical 15-year fixed mortgage rates
The 15-year fixed-rate mortgage has consistently offered lower interest rates than other longer-term options, giving it an edge for buyers looking to pay less overall.
“Home lenders typically charge less interest on these loans because they’re exposed to less risk with the shorter term,” says Kevin Parker, vice president of field mortgage originations at Navy Federal Credit Union. “And lower interest rates and shorter term means the borrower is spending less to borrow the money. Depending on the size of your loan, it can result in significant savings.”
How to find the best mortgage rates
The better your financial profile is, the lower your mortgage rate will be. Things like FICO score, debt-to-income ratio and employment history make up your financial picture, which lenders use to determine your risk. Low-risk borrowers are rewarded with lower interest rates. Conversely, banks offset their risk of high-risk borrowers by charging more interest.
Regardless of your financial profile, however, all borrowers should shop around for the best mortgage rate. You might be surprised to find that an online bank or small community bank offers a more competitive rate than a large bank. Start by looking at rate tables, calling lenders and getting information from your bank. Once you’ve done your research you can price compare.
Tax deductions and 15-year fixed mortgage rates
Every tax season, homeowners paying a mortgage who itemize have a chance to deduct interest. For folks with a 15-year home loan, they will stop getting this deduction sooner than homeowners with a 30-year mortgage.
The Tax Cuts and Jobs Act (TCJA), which is in effect from 2018 to 2025, allows most homeowners to deduct all of their mortgage interest payments for the year on home loans up to $750,000. For taxpayers who use married filing separate status, the home acquisition debt limit is $375,000.
Although it’s never fun to lose a deduction, the amount of money people with shorter-term mortgages save on interest will usually be more than they can save with the tax deduction.
15-year vs. 30-year fixed-mortgages
The key differences between the 15-year and 30-year fixed mortgages are:
- Length of mortgage
- Interest rate
- Total amount of interest paid
The interest rate and total amount of interest paid on 15-year fixed-rate mortgages is less, but the monthly payments are more.
Depending on your financial situation, it’s easier to qualify for a bigger loan with a 30-year mortgage because the monthly payments are more affordable. A lender won’t back a loan that you can’t afford so even if the total amount is the same, the difference in monthly payments can change what’s financially feasible for some borrowers.
“If there are concerns about a borrower’s future ability to repay their mortgage, the borrower may be better off taking a 30-year mortgage now and making additional payments along the way to pay it off early,” Bechtel says. “Borrowers should discuss their options with their loan officer.”
Refinancing out of a 15-year mortgage
If you can longer afford the monthly payments of a 15-year mortgage, one option is to refinance into a 30-year mortgage. However, this move comes with a cost. You’ll have to pay out-of-pocket expenses, such as home appraisals, document fees and loan origination fees
Also, a new loan means new underwriting. A lender will look at your credit score, debt-to-income ratio and employment history to determine whether they’ll refinance your loan. If your credit score has dropped or you’ve taken on more debt, your creditworthiness might not be as strong as when you applied for your original mortgage. This can affect your chances of refinancing.
Experts agree that making sure you’re in a solid financial position to take on a 15-year mortgage is better than rolling the dice and paying for it later.
Before you get a 15-year mortgage
Don’t jump into larger monthly payments without talking to your lender or financial adviser first. They can guide you on what other fees and expenses come with homeownership as well as the risks involved in not being able to pay your mortgage on time.
“The most important thing for individuals to understand is their money situation before starting to make these decisions, especially for a 15-year mortgage,” Jacob says. “They need to evaluate where they are and where they want to be before making these decisions. If it doesn’t pay down debt, then it would not be worth it.”