The Pros and Cons of a 15-Year Mortgage

The Pros and Cons of a 15-Year Mortgage


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MortgageEveryone has heard mortgage companies actively promoting their 15-year financing packages. Whether in print, online, radio ads, or television, new home buyers and the general public are pitched these plans regularly instead of a typical 30-year loan. It’s important to be informed when making such a crucial long-term decision.

While it may be a great option for some, others should be cautious of the pitfalls and risks associated with short-term financing options. Everyone has their own unique circumstances, and no one wants to be left homeless with their belongings on the street.

15-Year Mortgage Pros

Pro: An obvious pro to a 15-year mortgage is having the debt paid off in half the time, freeing up cash for other purchases. Depending on the size of the loan, you may end up saving tens of thousands of dollars in principal and interest. Industry experts suggest savings as high as two-and-a-half times more in interest compared to a conventional 30-year loan.

Pro: Interest rates may be far lower on a 15-year loan versus a 30-year loan. Not only will you be saving 15-years worth of interest payments, although certainly something to consider, the rates are typically lower for 15-year financing. Across the board, rates are usually 0.75 to 1 percent less compared to financing over a 15 year period instead of 30 years.

Mortgage brokers point out that the lower the interest rate, the faster the principal payout over the same period of time, netting a double bonus.

If this thought has you reaching for the phone to call your broker, slow down. There may be some drawbacks.

15-Year Mortgage Cons

Con: Monthly payments on a 15-year loan are higher than payments for a 30-year loan. The 15-year payment (both principal and interest) is approximately 1.5 times the 30-year fixed payment.

Example: On a $250,000 mortgage with a 3.92 percent interest rate for 30 years, the monthly payment would be $1,182 (excluding taxes and other costs). With the same terms on a 15-year mortgage, the monthly payment would be $1,839. Typically you’d be paying a lower interest rate on a 15-year loan, but even if reduced to 2.92 percent, the monthly payment would be $1,717.

While some homeowners may be comfortable with the additional costs, keep in mind that larger loan amounts yield larger monthly payments. If you are making monthly payments of $4,000 on a 30-year loan, that number jumps to $6,000 on a 15-year loan. There is some agreement that 15-year mortgages are not ideal for those with little savings, or large credit card debt, or whose income is inconsistent due to a commission based job. While it is possible to refinance a 15-year mortgage to a 30-year mortgage, there are expenses associated with doing so.

Con: You may have to live on a tighter budget for 15 years. Since monthly payments will be higher, you may not have free cash flow for other things in life. Maybe you’ll have to wait for that new car or put less money away for your kids’ college. You may not have extra money to put towards savings, retirement or a 401k. These are all important factors to consider because 15 years is a considerable amount of time.

These are just a few of the things to keep in mind when deciding on a 15-year or 30-year mortgage. If you like the idea of paying off your home loan as quickly as possible and paying as little interest as possible, you can still take out a conventional 30-year loan and make higher monthly payments as your financing allows. This prevents you from being locked into a monthly payment that at times may be difficult to make and gives you more flexibility if you find yourself struggling financially at some point.

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