The Pros And Cons Of A 15-Year Mortgage
As with any home mortgage loan and financial product, a 15-year mortgage comes with benefits and drawbacks attached. Readers considering applying for or refinancing to a 15-year mortgage would do well to consider their budgets, financial goals, and individual situations when deciding which mortgage type and term to pursue.
Pros Of A 15-Year Mortgage
Youll find many upsides attached to 15-year fixed-rate loans that make them attractive to certain groups of home buyers. If your goal is to build equity, pay off your mortgage over a shorter loan term, and pay less in interest, you may find that a 15-year mortgage is the right fit for you.
- Build home equity faster: Paying off your mortgage in 15 years can help homeowners build equity in their home at a faster are title loans legal in New Mexico rate than doing so under the terms of a 30-year mortgage. This equity can then be used along the way to borrow or draw credit against if you need additional funds to make renovations, add upgrades, or DIY improvements. Given lower interest rates, higher monthly payments, and shorter repayment terms, a 15-year mortgage can help you pay off your mortgage faster.
- Lower interest paid overall: Given that paying less money in interest fees is a big draw of the 15-year mortgage, let’s run the numbers. Say that your loan amount is $200,000, which is borrowed at an interest rate of 3.0%. This means you will pay out $48,609 over the life of the loanpare this to a 30-year fixed-rate mortgage with an interest rate over the past 5 years that has averaged 0.65% higher than its 15-year counterpart. Paying an interest rate of 3.65% on a loan of $200,000 over 30 years means that you’ll instead pay $129,371 in interest. That’s $80,762 (!!) more that you’ve potentially paid in interest fees that you could have spent elsewhere (for example, on education or medical needs) or saved for retirement. Want to run the numbers yourself to get a sense of potential cash savings? Use the Rocket Mortgage ® mortgage calculator.
- Full ownership faster: Homes are one of the most popular forms of investment in America today. Many property owners look to gains in value that occur over time as a way to recognize significant boosts in savings. If you want to pay off what is likely your largest debt and own your home outright at a faster pace than a 30-year mortgage allows, a 15-year loan could be the right option for you, since it cuts your payoff period in half.
Cons Of A 15-Year Mortgage
While 15-year mortgages come with many benefits, theyre not always the right option for every household or borrower. Some individuals or families may not be able to afford the higher monthly payments that come with these financial offerings, while others may prefer to invest their monies elsewhere.
- Higher monthly payments: The single biggest drawback for most home buyers looking to apply for or refinance to a 15-year loan are the higher monthly payments that are attached to them. In other words: Although they come with lower interest rates, 15-year mortgages also come with heftier monthly expenses that youll have to budget for because youre basically paying your house off in half the time of a 30-year loan. Just how much more of a potential pinch on your pocketbook are we talking here? To return to our prior example, with a $200,000 loan and 3% interest rate, a 30-year mortgage comes with a monthly payment of $675, whereas a 15-year mortgage at the same rate requires you to make a monthly payment of $1,105. That’s $430 more that would be added to your monthly payment under the terms of a 15-year mortgage and neither of these estimated payments includes the additional cost of taxes and insurance.