A 15-year mortgage can have you owning your home sooner and allow you to be mortgage-payment-free in retirement. Image source: Getty Images.
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The biggest financial transaction that most of us ever enter into is a mortgage -- we might be borrowing several hundred thousand dollars in order to secure a lovely roof over our heads. We often spend a lot of time hunting for the perfect home and a lot less time seeking the perfect mortgage. One mistake many make is automatically getting a 30-year fixed-rate loan when a 15-year mortgage might be better.
Why a 15-year mortgage?
What's so good about 15-year mortgages? Well, lots of things.
For starters, you'll own your own home sooner. That's generally a good thing, especially if you're approaching retirement. That's a time when you'll likely be living on a fixed income and probably a lower one than you're currently enjoying. Not having monthly mortgage payments can thereby be a relief in your work-free days.
A shorter loan can help you reach retirement faster. Image source: Getty Images.
Next, 15-year mortgages feature lower interest rates. Accordingto the folks at TheMortgageReport.com, "15-year mortgage rates currently beat 30-year rates by 70basis points (0.70%), which generates a mortgage interest cost savings of sixty-three percent over the life of a loan." That, coupled with the fact that the loan is half as long as a 30-year loan, means you'll end up paying far less in total interest.
The trade-off that turns many people off is that a 15-year mortgage will feature significantly higher monthly payments. Check out the following example, which assumesa $250,000 home is being bought with a 20%, or $50,000, down payment and a $200,000 mortgage:
A 30-year loan will last exactly twice as long as a 15-year one, but it will cost you much more than twice as much in interest! Opting for the shorter loan in this example would save you more than $85,000 in interest.
Why pay more than you need to in interest? Image source: Getty Images.
Of course, the main drawback of a 15-year loan is obvious: It will cost you more each month. That's a deal breaker for some people, but consider this approach instead: You might just buy a less expensive home in order to afford the 15-year mortgage. You might alternatively save up for the house a little longer and make a bigger down payment when you buy. That will reduce the size of the loan you need, making the 15-year loan's monthly payment smaller than it would have been.
A 15-year loan isn't for everyone, though. You might simply not be able to afford its payments. Even if you can, give some thought to your overall financial stability. If you're not pretty sure that your income will remain steady or will grow, then a 15-year loan could be risky and the lower payments of a 30-year loan might be preferable.
What to do
So what should you do? Well, if the 15-year loan makes sense to you and you can swing the payments comfortably, go for it. Another savvy option is to stick with a 30-year mortgage, but be sure that it has no prepayment penalty. Then you can simply pay more than you're required to each month -- or make occasional big extra payments -- in order to reduce the principal you owe, reduce the overall amount of interest you'll pay, and shorten the life of the loan. Using our example above, you might try to make regular $1,430 payments as if you had a 15-year loan -- and if you're unable to at any point, you can just make the lower regular payment.
Remember, too, that 15-year mortgages should be considered not just for the next time you buy a home, but for refinancing as well. Many people just refinance a 30-year loan into a new 30-year loan, starting the clock over again with a lower interest rate. Refinancing into a 15-year loan when rates are lower could leave you with monthly payments not too far off from your current ones but tied to a mortgage with a shorter life. A little time spent looking into your refinancing options can pay off with a lot of savings and faster home ownership.
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