7 Revelations of the 15 Year Mortgage Loan

When you shop for a mortgage for your new home, you have the choice between a 30 year and 15-year mortgage. Most Americans choose a 30-year loan, but there are good things about a 15-year mortgage that you may want to consider. Below is more information.

Overview of the Fifteen Year Mortgage

A 15-year mortgage is a home loan that is ½ the length of a traditional, 30-year mortgage. The home loan has much higher monthly payments – about 40% to 50% more – but you will pay half as much interest and pay for half as long. With a 15-year mortgage, you can easily save $100,000 in interest or even more.

About one out of six borrowers uses a 15-year mortgage. A 15-year home loan will be totally paid off if you make the payments on time in 15 years. Most 15-year mortgages have a fixed rate like a 30-year mortgage, and that rate is usually lower than the 30-year note.

Advantages of 15-Year Loans

The first advantage to a 15-year mortgage is that you will own your home free and clear faster. Many Americans want to own their own home without a bank having anything to do with it. That feeling of security that comes with owning a home outright is a big deal to a lot of people.

Second, you will earn equity in the home much faster with a 15-year loan because more of your monthly payment at first is going towards principal. If your goal is to accrue more equity faster, getting a 15-year mortgage makes sense.

Third, you will save money over the life of the loan with a 15-year mortgage. Lenders have less exposure to risk with a lower number of years, so you will get a lower rate. On average, you may pay .5% less per year on interest than with a 30-year loan. The mortgage is also cheaper because you will only pay interest for half as long.

To give you an idea, a 30-year fixed rate mortgage at 3.9% has monthly payments of $1,176 and total interest of $172,400 for a loan of $250,000. The 15-year loan has a rate of 3.2% fixed and a payment of $1749 and total interest of only $65,000. If you can afford to make that higher payment, then you could be a good candidate for a 15-year mortgage.

Disadvantages on 15-Year Mortgages

First, the most obvious disadvantage is that you need to make 50% higher payments or so on your 15-year mortgage. Also, you need to pay property taxes, insurance and possibly mortgage insurance if you put less than 20% down. This might make it more difficult to pay for other things as they come up, such as car and home repairs. Even if the numbers seem doable today, note that once you have signed onto a 15-year loan, you are locked into it unless you refinance and pay closing costs again.

Second, more money is tied up into your home that you can only access if you sell it or get a second mortgage. Do you want to have a lot of your net worth tied up into your residence?

Third, using more of your money for mortgage payments means you do not have money available for other types of investments. You could put more money into your IRA or 401k for example.

Fourth, you will be paying higher payments on the 15-year mortgage, so you will not be able to qualify for as large or as nice of a home.

Fifth, you will lose the mortgage interest deduction faster when you are paying a 15-year mortgage over a 30-year mortgage. On a related note, the lower rate that you are paying on a 15-year loan means you will not be able to write off as much mortgage interest on your taxes.

Conclusion

A 15-year, fixed rate mortgage can be a good financial tool for borrowers who can deal with the higher payments and still are able to put money aside for investing and emergencies. Paying off that home loan faster will make you feel freer. But if you are not 100% certain you can pay the higher payment for years to come, a 30-year note may be better. You also can get a 30-year loan and overpay on the mortgage, so you can get much of the same effect as a 15-year mortgage but with more flexibility.