A 15-year mortgage is a fixed-rate home loan with a repayment period of half the time compared to the 'traditional' 30-year mortgage. Take advantage of lower rates, less interest, and the potential for hundreds of thousands of dollars in long-term savings. This loan type is a viable option for higher-income borrowers and those with minimal debt responsibilities who can afford a higher monthly payment.
Key takeaways with a 15-year mortgage
Own your home free and clear in half the time
What could you do in life if you paid off your mortgage 15 years sooner than originally expected? Whether it's retiring early, buying an investment property, or covering your child's college tuition, you have options with a shorter-term home loan. As long as you expect to have a stable household income for the foreseeable future, a 15-year mortgage could be a program worth considering.
Pay significantly less in interest
Ask anyone who paid off a 30-year mortgage, and they'll probably tell you it felt like a marathon, especially during the first few years of repayment. Choosing a 15-year loan, on the other hand, means you'll pay a lot less in interest throughout your loan. Borrowers who opt for a shorter-term mortgage benefit from having more of their monthly payment go toward the principal and not additional interest.
Build equity faster
The sooner you pay down your principal, the sooner you build and have access to your equity. The combination of rising home prices and a 15-year mortgage provides many possibilities down the road. Borrowers with a 30-year loan may not have this flexibility with their home equity.
Ideal candidates are higher earners
It should be no surprise that lenders typically reserve 15-year loans for high-income borrowers and households. Since you'll only be making half the payments than you would with a 30-year mortgage, you can expect to owe quite a bit more every month. You may also qualify for this loan type if you have no or minimal debt responsibilities or have significant cash reserves.
What you need to know
A 15-year mortgage minimizes your total borrowing costs. As we explained above, you're getting a lower interest rate, and a larger chunk of your monthly payment goes toward paying down the loan principal instead of the interest owed. So, you're building equity faster and spending less on overall interest.
Let's look at an example for a $500,000 loan amount. If market rates were 4.75% for a 30-year mortgage, you'd be paying a little more than $2,600 a month. Your payment would also vary based on taxes and insurance, credit score, and debt-to-income ratio.
What if you decide to pay off that same $500,000 loan amount in half the time? A 15-year mortgage would save you upwards of $273,000 over your term! The lone downside, though, is the higher monthly payment.
Who should consider a 15-year mortgage?
Many homeowners can benefit from a 15-year mortgage. These folks, in particular, might consider this loan type when evaluating their financial future.
You can take on a higher monthly payment
Don't assume you need to be in a top position at your company to qualify for a 15-year home loan. But you must be able to comfortably afford a higher payment, which likely means having little or no non-mortgage debt. Some borrowers pick up second jobs or side hustles to ensure a 15-year loan works with their budget.
You can land a much lower interest rate
If you haven't refinanced and have a higher rate than current market rates, a 15-year loan could be a no-brainer. Mortgage experts often recommend exploring a refinance to lower your rate by half a point, but even more so if you can lower it by a full percentage point or more. The bigger the difference, the less your monthly payment will be.
You want to retire without a mortgage
The last thing you probably want to do is dip into your savings to pay the last few years of your mortgage. A 15-year loan helps you be done with your mortgage while you still work, so you don't have to touch your savings in retirement. A mortgage-free retirement gives you greater freedom to enjoy your golden years without worrying as much about finances.
The biggest downside to this loan program is the higher payment. Though a 15-year loan feels more like a sprint than its 30-year counterpart, it doesn't take much for borrowers to feel squeezed with their budget. That's why it's imperative to consider your current and future financial situation before moving forward with this loan option.
Now, say you eliminate unnecessary expenses and tweak a few things in your budget to afford the higher payment. You still risk experiencing money problems because the funds put toward savings and retirement will now be applied to your mortgage. That's a lot of pressure for some homeowners to carry, especially if anything happens with a job.
The final disadvantage with a 15-year term is that it can keep you from enjoying life to the fullest. Since you'll be cutting back on a lot of discretionary spending, you may not have the luxury of taking a summer vacation every year or going all out during the holidays. Smaller things like meals out or the occasional splurge item will likely become less frequent with a 15-year mortgage.
It's natural to have questions about a 15-year mortgage and whether this loan type makes sense for you. Note the most frequently asked questions and responses as you begin your research. The more you know about a shorter-term loan and its benefits, the easier it should be to make a decision.
What happens if I make extra payments on a 15-year mortgage?
Making extra payments on a 15-year loan helps you pay off your mortgage even faster. Depending on your strategy, you could get rid of this debt months or years sooner. Just make sure you're applying these additional funds toward the principal balance and not interest.
Is it harder to get a 15-year mortgage?
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.
What credit score do you need for a 15-year mortgage?
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.
How much money can you save on a 15-year mortgage?
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.
How much more a month is a 15-year mortgage?
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.
Is it always better to have a shorter mortgage term?
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.
Can I refinance a 30-year mortgage to a 15-year mortgage?
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.
Borrowers should expect a similar process once they apply for a new loan. You'll need to gather various forms of documentation, including W-2s, bank statements, and recent paystubs. Lenders use this information to determine whether you're a good candidate for a shorter loan.
Above all else, a 15-year mortgage can be a valuable tool for your financial future. Connect with a salary-based mortgage consultant to learn more.