Most people who get a mortgage sign up for a 30-year loan. But if you're able to swing a 15-year mortgage, you stand to reap a number of benefits. Because you'll be borrowing money for less time, you'll also be paying less interest. In fact, your total interest charges will probably equal less than half of what they'd be under a 30-year borrowing scenario, partly because of your accelerated repayment schedule, and partly because you'll likely snag a lower interest rate to begin with.
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While a 15-year mortgage isn't a good choice for everyone, under the right circumstances, it can save you many thousands of dollars over the life of your home loan. Here are three situations where a 15-year mortgage absolutely makes sense.
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1. You can afford the higher monthly payments
The downside of getting a 15-year mortgage, as opposed to a 30-year loan, is that you'll need to pay down that principal in half the time. As such, your monthly payments are apt to be significantly larger. But if housing is your primary expense and you don't have too many other bills or loans to deal with, then it pays to take on higher payments and pocket the interest savings over time.
Imagine you're looking at a 30-year, $300,000 mortgage at 4% interest. In that scenario, your monthly payments will be $1,432, and your lifetime payments will be $515,520 ($1,432 x 360 payments). Now if you take out a $300,000 home loan at 4% over a 15-year period, your monthly payments will be $2,219 -- significantly higher than $1,432. However, your lifetime payments will total just $399,420 ($2,219 x 180 payments). When you subtract the principal $300,000 loan, you'll end up paying a total of $215,520 in interest with a 30-year mortgage, but just $99,420 with a 15-year mortgage.
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Furthermore, this example assumes that you'd be looking at the same interest rate for both a 15- and 30-year loan. In reality, you'll probably get a lower rate with a 15-year loan, which would add to your savings even more. As long as you can swing the higher monthly payment, you'll come out way ahead in the long run.
2. Your income is steady and predictable
The problem with taking on a larger monthly mortgage payment is that if you lose your job, you'll have a more difficult time keeping up with payments than you would with a 30-year loan. But if you're many years into a stable career, and your company isn't going through major changes, you're less likely to fall victim to unemployment than someone who's new to the workforce or whose industry is subject to ebbs and flows.
Similarly, if you're self-employed with an established business and a strong history of steady income, you're less likely to suddenly find yourself out of work than someone whose employment status is based on other people's decisions. (After all, you're not going to fire yourself.) The more predictable your income, the better suited you are to a 15-year mortgage.
3. You want to pay off your mortgage before retirement
Paying off your mortgage before entering retirement can give you added financial flexibility during your golden years. But if you're looking at buying a home in your 40s or 50s and you wish to retire in your mid- to late 60s, a 30-year loan won't help you achieve that goal unless you pay it off early -- in which case you might as well get a 15-year mortgage and benefit from a lower interest rate. If you're serious about going into retirement mortgage-free, a 15-year loan will make it easier to pay down your housing debt quickly.
Of course, not everybody can pay off a mortgage in time for retirement. According to the Consumer Financial Protection Bureau, 30% of homeowners 65 and older still carried a mortgage as of 2011. But if you do manage to knock out those mortgage payments before you stop working, you'll have an easier time managing your expenses once you move over to a fixed income.
If you're not in a strong place financially and don't have a reliable source of income, then a 15-year mortgage is a seriously bad choice. But if you have a stable job, a decent salary, and limited expenses, a 15-year mortgage can save you money and help you pay off your home in time for retirement.
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