Pros and cons of a 15-year mortgage

The 30-year, fixed-rate mortgage is the go-to home loan — for most Americans. 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.

Though not as popular,15-year mortgages have a lot to recommend them. Let’s look at their pros and cons, and compare them to those of their 30-year cousins.

What is a 15-year mortgage?

A 15-year mortgage is a home loan paid back in monthly installments over 15 years. Typically, the interest rate and monthly payment are fixed throughout the life of the loan. 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.

Benefits of a 15-year fixed mortgage

• Long-term savings: 15-year mortgages typically carry a lower interest rate than 30-year mortgages. The difference reflects their shorter lifespan: Because the lender assumes fewer years of risk, it offers a better rate.
• Faster accumulation of home equity: By paying back the loan’s principal faster, 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 get a home equity line of credit (HELOC) or home equity loan more quickly.
• Free and clear, at an earlier point: If you’re approaching retirement — or thinking of early retirement — and want to cut expenses, 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, or just give your discretionary income a boost.

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 harder than for a 30-year one.
• Less resources for other goals: A heftier mortgage commitment can mean less money to devote each month to an emergency fund, retirement plan contributions or other long-term financial goals.

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 and make payments on time, it’s a strategic move.

However, a 15-year mortgage may not be a good fit for you if you have a lot of high-interest personal loans, auto loans or credit cards, because 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.

Similarly, if you do not have large cash reserves or an uneven income flow, the higher monthly payments of a 15-year mortgage might create a financial hardship. Don’t obligate yourself to paying more if it’ll leave you financially strapped and unable to invest or save for retirement or other future needs.

Or even shorter-term needs — like the home you’re taking out the mortgage for. Yes, 15-year mortgages have lower interest rates, but if you’re limited in what you can afford monthly, opting for a 15-year mortgage may mean getting a smaller loan overall, which in turn could translate into a smaller or less-well-located home.

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 with a 30-year mortgage and interest rates have dropped since then, it might be a good idea to consider refinancing. You’d also want to be halfway into your mortgage term, at least, for this move to make the most sense. And also, planning to stay put in the home for  several more years, at leaset, since you want time to break even on the new closing costs you’ll incur.

Should you get a 15-year mortgage?

Ultimately, opting for a 15-year mortgage can save you 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.

And also, that it doesn’t significantly impact the size of the mortgage you need. In that regard, a lot depends on the current gap in interest rates between 15- and 30-year mortgages. A mortgage calculator can help you crunch the numbers in both scenarios and determine what makes the best financial sense.

Additional reporting by Kate Peters