A 15-year fixed-rate mortgage loan allows you to quickly build equity in your home, save big on interest cost, and own your home outright in half the time of a 30-year mortgage. Borrowers who carry a 15-year fixed rate mortgage have the same monthly payment and interest rate for the term of the loan. These benefits sound fantastic, and they are, but as with any investment decision there are trade-offs to consider.
Enjoy the Advantages of Equity
Paying your mortgage off faster means you build equity quicker. There are a number of ways you can use the equity in your home. These include taking a home equity line of credit, second mortgage or home improvement loan. High equity also improves your chances of qualifying for refinancing your home.
Additional Advantages of a 15-Year Mortgage
Purchasing a home with a 15-year loan means you spend far less on interest than you would over the life of a 30-year loan. Not only does less interest accrue over the shorter loan term, but typically the interest rates for 15-year loans are lower than rates for 30-year loans.
For example, in borrowing $300,000.00 on a 30-year loan with and an interest rate of 4%, you pay a total of $215,609.00 in interest over the life of the loan. With a 15-year loan for 300K and an interest rate of 3.2%, you pay a total of $78,130.00 in interest over the life of the loan, quite a difference.
Another perk that comes with the 15-year fixed-rate mortgage, many can pay off their home loan prior to retirement. Cash flow is freed up for other investments, and it is easier to live on a fixed retirement income with no mortgage.
Disadvantages of the 15-year Mortgage
The main disadvantage of the 15-year mortgage is the higher monthly payments. With a $300,000.00 mortgage at 4% interest over 30 years, the monthly payment for principal and interest is $1432.00. A $300,000.00 15-year mortgage at 3.2% requires a monthly principal and interest payment of $2,101.00.
There is risk in committing to the higher payment that comes with a 15-year mortgage. If you or your spouse become unemployed it may be difficult to make payments. When considering the pros and cons of the 15-year mortgage, look at your ability to pay if there is a break in income. With a nest egg set aside (in non-retirement account funds), you can feel secure in your ability to carry a 15-year mortgage in tough times. A nest egg that can cover six months of living expenses is considered adequate.
Are you able to save for retirement with a monthly mortgage payment that is several hundred dollars higher than the payment on a conventional 30-year mortgage? Be sure to include retirement savings in projected expenses while you consider the 15-year mortgage option.
A 15-Year Mortgage Checklist
Consider the following criteria to determine if a 15-year mortgage is right for you over other mortgage options:
- You are highly motivated to build equity quickly and pay less in interest over the life of your mortgage loan.
- Your monthly budget includes the mortgage payment, living expenses and retirement savings.
- You have a rainy day nest egg set aside.
True? Then you are a good candidate for a 15-year mortgage.