How it Works
A 15-year mortgage is a loan that helps you pay off your home in half the time as a traditional 30-year mortgage. You're getting a lower interest rate, with a larger chunk of your money going toward the principal. So, you're building equity faster and spending less on overall interest.
Let's use an example of a $350,000 home. If market rates were 6.75% for a 30-year mortgage (6.939% APR)* with a principal and interest payment of $2,270.09. Then you had a 6.00% for a 15-year mortgage (6.298% APR) with a principal and interest payment of $2,953.50, you could expect to pay under $182,000 in interest over the life of the loan. That's a savings of over $285,000!
*This example depicts the advantages of the loan program and rates are for illustrative purposes only. Rates change daily, and not all products are available in all states. Your loan will be based upon your information and your payments may vary from this example.
Additional disclosures
Consider a 15-year mortgage if you:
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Are a young homebuyer with sufficient income to meet the higher monthly payments.
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You may choose this loan to pay off the house before your child starts college.
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Are a homebuyer who's more established in your career. You and others in your demographic often want to own homes before retirement, eliminating what's likely your largest expense ahead of your golden years.
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Can purchase a primary or investment home with cash but want to maintain the tax benefits of having a mortgage. Doing so could still leave you with significant reserves you might want for future investments or business opportunities.
What you need to know about 15-year mortgages
Many borrowers assume that a 30-year loan is their only option. They don't think much about whether they could afford a higher monthly payment and, in turn, own their home faster. We suggest working with a dedicated lender who will help you crunch the numbers and determine if a 15-year mortgage could be a possibility.
The first thing you should be mindful of with a 15-year mortgage is the higher monthly payments. Since you have half the time to pay off the loan, your lender will require more money every month. This concept scares off many buyers who may be a good candidates for a 15-year mortgage.
The advantage of a shorter-term loan is that you'll spend much less on interest once you pay off your home. It could even be hundreds of thousands of dollars, depending on where you live and your loan amount. That's a lot of money you get to keep instead of giving to a bank.
Let's consider an example. Say you buy a home for $450,000. You put down $50,000 and must now finance the remaining $400,000.
You spend some time reviewing your financial situation and deciding whether a shorter term is the way to go. Maybe you're confident in your job stability and the prospect of an upcoming promotion or two in the next few years. Additionally, you have little to no debt and have no problem cutting back if things get too tight with your budget.
Next comes the conversation with your lender. They explain that you would have to pay close to $1,000 more every month with a 15-year mortgage. However, choosing this loan type over a 30-year mortgage would mean saving nearly $200,000 in the long run!
Think of what you could do with that kind of money. You could retire early, buy a second home, or even start your own business. What may seem like impossible dreams suddenly become attainable when you free up such a large percentage of your income.
Borrowers should also know that a 15-year mortgage typically has a lower interest rate than a 30-year mortgage. You're technically saving on interest in the short and long term. Again, you're able to keep more of your money with this particular loan program.
The pros and cons of a 15-year mortgage
There are advantages and disadvantages to consider with a 15-year mortgage. While it could make sense for you specifically, this loan option might not suit every prospective buyer. Note the following information before talking to a lender about a shorter-term mortgage.
Pros
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Own your home faster
This is self-explanatory but worth discussing. If you're looking to finance a house, you can choose a 30-year or a 15-year loan. Opting for the latter means you'll pay off your house in half the time. You're done with mortgage debt once you submit your final mortgage payment at the end of year 15. Imagine that financial burden off your plate while others still have another 15 years of payments!
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Build equity faster
You can calculate your equity by taking the value of your home minus your loan balance. The benefit of a 15-year mortgage is that you'll pay down the loan faster since more of your funds go to the principal. On the other hand, it can take a while to make a dent in the principal of a 30-year loan, especially in the early years of your repayment period.
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Spend less on interest
Increasing equity and spending less on interest go hand in hand. As explained above, a 15-year mortgage can save you hundreds of thousands in interest. So, you can feel comfortable knowing that more of your monthly payment goes toward the principal and not interest.
Cons
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Higher monthly payment
Unfortunately, you can't own your home faster unless you make some sacrifices. Expect to tighten your budget, so you have the necessary funds for a higher payment. Many borrowers who choose a 15-year mortgage end up pausing their retirement contributions, putting smaller amounts in savings, or cutting back on non-essential expenses like subscription services or meals out. Lenders usually only recommend a shorter term for borrowers with either significant cash reserves or a stable, higher-paying job.
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Less flexibility
Another downside of a 15-year mortgage is that a higher percentage of your income will be tied up in your home. You may not have the cash available for working toward other financial goals, such as investing, saving for emergencies, or paying off debt. There's also the possibility of delaying certain vacations and other fun moments that are often a part of enjoying your life. A 30-year mortgage could be the better choice if you want this level of flexibility and balance.
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Not ideal for first-time buyers
Today's first-time homebuyers tend to view their first residence as a starter home. They're often tired of renting and want to build their own equity. If you're in this group, the chances are that you'll only be in your starter home for a few years before moving to your next or forever home. You'll likely want the lowest monthly payment possible, which you won't get with a 15-year mortgage. Alternatively, this shorter-term loan could be beneficial if you don't plan on moving right away. A trusted lender can help you determine whether this loan type aligns with your future house goals.
How does a 15-year mortgage compare to 30-year options?
Let's revisit the above example of a $400,000 home loan. A 30-year mortgage with a 4.5% interest rate would yield a monthly payment of around $2,000. That might be a good deal for first-time buyers who previously spent about the same amount on rent.
But what if you're more established in your career, have minimal debt balances, and feel confident with your cash reserves? As long as you plan on being in your home for a while, a 15-year mortgage could be more beneficial. The key, though, is that you can handle the higher payment.
Here's what we're talking about. Perhaps you can obtain a 15-year loan with a 4% interest rate. While your monthly payments will be quite a bit higher, you'll also own your residence in half the time.
From a different perspective, you'd pay over $300,000 in interest with a traditional 30-year mortgage. Instead, a 15-year loan means paying a little more than $100,000 in interest. That's a notable difference for anyone, regardless of financial situation or goals.
FAQ's
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Unlike a fixed-year mortgage where the interest rate stays the same, an ARM or adjustable-rate mortgage changes after a set number of years. For example, if you choose a 15-year fixed-rate mortgage, your interest rate will never change. You benefit from the stability of a low, fixed rate and the same monthly payment unless you refinance.
The main appeal of an ARM loan is the lower interest rate that often comes with it. So, you might be able to take advantage of a low rate for several years until it adjusts every year for the remainder of the loan. The concern with ARMs is that it's impossible to predict future market trends and your financial situation, for that matter.
A 15-year ARM, also known as a 15/15 ARM, has a fixed interest rate for the first 15 years before adjusting once and then staying the same for the rest of the loan. While a 15-year ARM might sound better than more common ARM loans, it could still leave you significantly higher payments than the first 15 years. You may be better off avoiding such risk and selecting a 15-year fixed mortgage.
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Yes, borrowers must meet more stringent requirements to qualify for this loan program. Lenders want to see proof of a stable income, minimal non-mortgage debt, and a good credit score. If your household income isn't high enough or your debt-to-income ratio needs work, you'll likely need to put your 15-year mortgage plan on hold.
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Though many borrowers can obtain a 30-year loan with a credit score in the 600s, you should aim for an even higher score if you're hoping to land a 15-year mortgage. Lenders typically reserve the lowest interest rates for those with a score of 740 or higher. Remember that requirements and interest rates vary by lender and that you can always work on improving your score before looking into home financing.
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It mostly depends on the loan amount. For example, if you're buying your forever home in a higher-priced area, you're likely to save hundreds of thousands with a 15-year term. Alternatively, the same loan program could save you tens of thousands on a starter home or fixer-upper in a lower-priced region.
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Income, credit score, and current interest rates all factor into your mortgage payments. If you're refinancing from a 30-year mortgage into a 15-year mortgage and you lock into a much lower rate, your payment may only increase by a few hundred dollars. It could also be a more significant increase, especially if you're buying a home with a shorter term.
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Not exactly. You may benefit more from a traditional 30-year mortgage if you want greater flexibility in your monthly budget or peace of mind in case of an unexpected loss in income or a medical emergency. There isn't much wiggle room with a shorter mortgage term, and you could be scrambling if the unexpected happens.
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Absolutely. Many homeowners make this move after paying their 30-year mortgage for the first few years and realizing they can afford a slightly higher payment. So, it may be worth choosing a 30-year term in the beginning to use extra funds to pay off debt and, once you achieve that goal, refinance to a 15-year mortgage.
