Why 15 Years Is the Perfect Term for a Mortgage

By Dan Caplinger Markets Fool.com

Most homeowners think about mortgages in terms of what they can afford in a monthly payment. Yet the better question to ask is how much of your money will go toward paying interest to the bank in the years that you own your home. By going beyond the typical 30-year mortgage and instead looking at the 15-year mortgage, you can put yourself in a much better financial position over time and keep more of your hard-earned money for yourself. Among all the reasons to consider 15-year mortgages over longer alternatives, three truly stand out.

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1. You can save dramatically on interest

As low as interest rates are right now, 15-year mortgages have even lower rates than their 30-year counterparts. A typical 30-year mortgage currently has an interest rate of roughly 4.125%. However, you can get a 15-year mortgage at the much lower rate of around 3.25%.

Admittedly, that's less than a single percentage point, and so you might not think that the savings are worth your while. However, if you borrow $300,000 on a mortgage loan, then a difference of seven-eighths of a percentage point translates to more than $200 in savings on monthly interest costs. When you extend that over the full term of a loan, the savings is even starker: less than $80,000 in total interest on a 15-year mortgage compared to nearly $225,000 on a 30-year.

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2. You can grow home equity quickly

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Lower rates are great, but a 15-year mortgage forces you to make higher monthly payments in order to get the loan paid off twice as quickly. In many cases, the increase with a 15-year mortgage will be substantial.

For instance, using the same example as above, a $300,000 mortgage loan for 30 years at 4.125% will carry a monthly payment of about $1,450. On the other hand, a 15-year mortgage at 3.25% for the same amount will have you paying just over $2,100, or roughly $650 more per month.

That's not financially feasible for some homeowners, but if you can swing it, then you'll manage to build up your home equity much more quickly with a 15-year mortgage. In the first year of a 15-year mortgage, you pay down $15,780 of your outstanding mortgage. Compare that to just $5,170 of home equity that you'll get from a 30-year mortgage, or less than a third of what you'd have with a 15-year loan.

That can be useful for several reasons. First, if you want to get a home equity loan at some point in the future, you'll actually have the equity to make the loan meaningful. Moreover, in the long run, you'll have the loan paid off that much faster, letting you eliminate mortgage payments entirely in time.

3. You can prove your commitment to financial responsibility

Many homeowners got themselves in trouble because they bought homes that it turned out they really couldn't afford. Using a 15-year mortgage requires you to exercise more financial discipline in saving for the home, and it can lead to your borrowing less than you would if you stretched as far as possible with a 30-year loan.

For instance, in the above example, if you only wanted to spend $1,450 per month on a mortgage payment, you could still get a 15-year mortgage -- but you'd only be able to borrow $207,000. That would mean that you'd either have to buy a cheaper home or come up with $93,000 more out of pocket to use as a down payment on the 15-year loan. That's a huge challenge in many real estate markets and with homeowners who are in common financial situations. Yet if you make using a 15-year mortgage a priority, it can help you figure out what's most important in your home-buying experience.

Look at the 15-year mortgage

Some borrowers simply can't deal with the higher monthly payments that 15-year mortgages require. But whether you're refinancing a loan that has far less than 30 years left to run or you're looking at buying a new home but don't want to saddle yourself with three decades' worth of debt, then the 15-year mortgage can be your best financing solution.

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