THE 15-YEAR MORTGAGE: Pros & Cons
By Jessica Hudson | May 1, 2019
As the name suggests, 15-year mortgages are paid off in 15 years, assuming all payments are made on schedule (the most common duration for a mortgage is 30 years). With a 15-year mortgage you'll own a home much faster and save a lot of money, but you'll need to budget carefully for the higher monthly payments.
Shorter Path to Full Homeownership:
Owning a home free and clear is part of the American Dream. Knowing that their home is fully paid off gives many people a sense of safety and security that is of upmost importance.
Build Equity Faster:
A 15-year mortgage typically has significantly lower interest rates and a higher monthly payment amount which builds equity faster because you pay down the principal balance more quickly.
Shorter terms are less risky for lenders, so they charge less interest on them. The difference can range from a quarter to three-quarters of a percentage point, which can make a substantial difference in your monthly payment. A 15-year mortgage also is cheaper because you pay interest over half as many years than with a 30-year mortgage. Compare the principal and interest - not including homeowners' insurance, property tax or private mortgage insurance - for $200,000 mortgages:
A 30-year fixed-rate mortgage at 4% has monthly payments of $955
and a total interest cost of $143,739
A 15-year fixed-rate mortgage at 3.5% has monthly payments of $1,479
and a total interest cost of $57,358 - a savings of $86,381 if you kept the
loans for their entire terms
Monthly payments for a 15-year mortgage run about 50% higher than on a 30-year mortgage (see above example). This could push a home out of a lot of borrower's budgets. Many financial experts recommend having at least three to six months of emergency savings set aside in case you lose your job or cannot work for extended periods. Even if the numbers seem doable now, this is an ironclad commitment. There's no escape except selling, refinancing or foreclosure.
Using money for mortgage payments means it's not avaliable for other investments - a higher return on stock investment, for example, or capturing an employer's matching contribution to a retirement account.
Qualify for Less Home:
The higher monthly payments for a 15-year mortgage mean you'll qualify for a less expensive property than if you'd stretch the loan over 30 years and kept your payments lower.
Lose Tax Advantages:
You lose the mortgage interest deduction sooner when you pay off the loan in half the usual time. The lower rate on a 15-year mortgage also reduces the amount of interest paid compared with a 30-year mortgage. Less interest means a smaller mortgage deduction.