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When looking at mortgage rates, it’s common to compare 30-year loans. However, you don’t have to lock yourself into a three-decade contract when buying a home or refinancing your existing loan; you can cut that time in half with a 15-year mortgage.
- A 15-year mortgage means you'll pay less in interest due to a lower rate and shorter term, and pay off your mortgage sooner.
- The monthly payments on a 15-year mortgage will be higher due to the shorter repayment schedule.
- A 15-year mortgage might be a good idea if you can afford the monthly payments or you're more than halfway into a 30-year mortgage.
What is a 15-year mortgage?
A 15-year mortgage is a home loan paid back in monthly installments over a period of 15 years. While paying back your loan faster and saving money on interest sounds appealing, shortening the loan term means increasing the size of your monthly payments.
Who is a 15-year fixed mortgage best for?
If you have the financial bandwidth to make higher monthly payments, a 15-year mortgage is likely to have a more competitive interest rate than a 30-year loan. As long as you’re able to balance other financial priorities like making on-time bill payments and saving for retirement, it’s a solid financial consideration.
If you have higher-interest debt like personal loans or credit cards, you might want to focus your available income on paying down these balances first. Saving money on mortgage interest won’t get you ahead in the long term if you’re racking up interest on other debt.
Benefits of a 15-year fixed mortgage
- Long-term savings: Because the lender assumes fewer years of risk, you’ll be paying lower interest over the life of the loan.
- Faster equity in the home: With larger monthly payments toward your loan’s principal, and a lower interest rate, you’ll build equity more quickly in your home. This has several positive implications: If you’re paying for private mortgage insurance (PMI), for example, you’ll be able to cancel it sooner. You’ll also be able to access a home equity line of credit (HELOC) or home equity loan more quickly.
- You’ll free up your budget after only 15 years: If you’re approaching retirement, for instance, and want to cut expenses, the prospect of paying off your home in 15 years instead of 30 is certainly appealing. Even if you don’t mind a monthly payment, redirecting this amount can help you achieve other financial goals that much sooner.
Disadvantages of a 15-year fixed mortgage
- Larger monthly payments: A loan term that’s half as long means your monthly payments will be larger than they would be with a 30-year year mortgage.
- Potentially tougher qualification requirements: Your lender will want to verify that your income can accommodate these larger payments. As such, qualifying for a 15-year loan might be tougher than for a 30-year one.
- Less resources for other goals: When your mortgage commitment is heftier, you might have less to devote each month to an emergency fund, investing or other savings goals.
Refinancing to a 15-year mortgage
Buying a new home is not the only time to consider a 15-year mortgage loan. You can also refinance your existing mortgage to leverage the benefits of a shorter loan term. If you started off with a 30-year mortgage and interest rates have come down since then, it might be a good idea to consider refinancing.
Ultimately, opting for a 15-year mortgage can save a lot of money in the long run. You just need to make sure you have room in your monthly budget to accommodate the higher payments.