Is a 15-year fixed mortgage worth it? The answer, absolutely. A shorter term mortgage—15 years versus 30 years—is one of the best ways to reduce mortgage debt and can save you thousands of dollars in interest payments.
For instance, consider the staggering difference between a 30-year mortgage and 15-year mortgage, both for $400,000. At 4% interest on a 30-year mortgage, you’ll pay an extra $154,903 in interest over the life of the loan compared to a 15-year mortgage term. You’ll pay total interest of $287,478.03 over 30 years. With a shorter 15-year fixed mortgage, you’ll pay only $132,575 in interest. That’s a staggering savings of $154,903.1
Outside of the savings on interest, there are pros and cons for getting a 15-year mortgage instead of a 30-year mortgage. Here’s a primer on how to determine if a 15-year home loan is a smart move for you.
Pros and Cons of 15-Year Mortgages over 30-Year Mortgages
|Pros 15 vs 30-Year Mortgage||Cons 15 vs 30-Year Mortgage|
|· Faster to pay off
· Less accumulated interest
· Faster buildup of equity
· Lower interest rates
· Faster pay down of principal
|· Higher monthly payments
· Lower mortgage interest tax deduction
· Equity is tied up
· Less money for other investments
Should I Get a 15-Year Mortgage?
The concept of the 15-year mortgage for most is, “I’m going to bite, chew and claw my way through a short-term, higher mortgage payment to get to a brighter financial future.”
In today’s interest rate environment, a 15-year mortgage has undeniable appeal. Outside of the difference in interest costs between a 30-year and 15-year mortgage, there are the advantages that being mortgage-free means for your future. There is the reality too though, of a higher monthly payment.
Consumers who are in a financial position to handle a higher monthly loan payment are ideally suited for a 15-year mortgage. People who anticipate an increase in income or a decrease in debt income are also good candidates for a 15-year loan term. People who plan to retire within 30 years are also good candidates. Because carrying a mortgage into retirement isn’t ideal.
Consider a 15-year mortgage if any of the following apply to you:
- You don’t want debt hanging over you into the future
- You have a strong income
- You expect to see an increase in income fairly soon
- You expect a decrease in debt soon
- You plan to retire in less than 30 years
How Do I Know I’m Financially Ready for a 15-Year Mortgage?
In most cases, you need a strong income to get approval for a 15-year mortgage—even a 30-year mortgage for that matter. When you switch from a 30-year mortgage to a 15-year fixed-rate loan, you pay down the loan in half the amount of time. But doing so can also double your monthly payments for that 180-month term. It can also lower your home mortgage interest tax deduction.
Your income will have to support the larger loan payments. If you have other debts with a monthly payment, like cars, installment loans or credit obligations, factor those in as well.
If you’re interested in a 15-year mortgage but don’t feel financially stable enough to take on the higher monthly premiums, don’t give. There are things you can do to improve your finances to take on a 15-year mortgage. And you can always start with a 30-year mortgage and refinance to a 15-year mortgage later.
How Can I Improve My Financial Stability for a 15-Year Mortgage?
There are at least three ways to improve your capacity to take on a 15-year mortgage:
1. Pay Off Your Debts
When your lender looks at your monthly income to qualify you for a 15-year fixed-rate loan, part of the equation is your debt load.
For a preview on how the lender sees your application, take your proposed total monthly payment for a 15-year mortgage payment and add that to the minimum monthly payments for all your other consumer obligations. Divide the sum by 0.45.
(total monthly mortgage payment + consumer obligations) ÷ 0.45 = minimum income
For simplicity, let’s assume your total monthly mortgage payment would be $1,000 and your consumer obligations are $500. 1,000 + 500 is $1,500. Divided by .45, your minimum monthly income needs to be $3,333.
This formula gives you the minimum monthly income you need to offset a 15-year mortgage. If you make anything less than that, you probably won’t qualify for a 15-year home loan.
Because your current debt factors into this formula, paying off debt can easily reduce the amount of income you need to qualify. And getting rid of debt can also cut down on how much you need to borrow because you can save up a larger down payment at a faster rate.
2. Borrow Less
Buying a home that requires a smaller mortgage payment or making a larger down payment to reduce your mortgage payment is a way to keep a lid on your monthly costs. You’ll maintain a healthy alignment with your income, housing and living expenses.
Got extra cash in the bank? If you don’t have an immediate purpose for the money in your bank account beyond your savings reserves, use the funds to put down a larger down payment and reduce your mortgage amount.
With a bigger down payment, your monthly payments are more manageable and still let you take out a 15-year loan and pay less in interest expenses over the life of the loan. Borrowing less and putting down a larger down payment are great ways to make your money work for you.
3. Generate Extra Cash
Do you have assets like stocks that you can sell or a money-market fund you can trade out of? With extra money, you can pay off debts or apply for a smaller mortgage by putting down a larger down payment as covered above.
You can also get additional funds from selling another property. If you have a property you’ve been planning to sell—like a previous home—any additional cash generated from selling that property puta you in a better position to take on a 15-year mortgage.
What Other Options Are There?
A 15-year home loan isn’t realistic for everyone. A 25-year or 20-year mortgage are both alternative options.
Another school of thought is to voluntarily make larger monthly payments on your 30-year mortgage. It’s a fantastic way to save substantial interest over the term of the loan, since larger-than-anticipated monthly payments go to your loan’s principal, so you owe less in interest in the end.
You can even start with a 15-year mortgage and refinance your home at a later date to a 30-year home loan should your finances change or vice versa.
What Are Mortgage Points and How are They Used?
Mortgage points are also known as discount points and are fees paid directly to the lender at closing. In exchange, the borrower—you—get a reduced interest rate. It’s similar to putting down a larger down payment, but instead, you’re paying for a lower interest rate. This is also referred to as a buying down the rate. Buying points lowers the amount of your monthly mortgage payment. One point typically costs 1% of the total mortgage amount.
Consider a loan amount of $400,000. The cost for one mortgage point is $4,000. That point would lower your APR a quarter point—from 4.5% to 4.25%. The point would lower your monthly payment from $3,059.97 to $3,009.11—a savings of approximately $50.86 a month and a savings of $9,154.71 in overall interest for a 15-year loan. The break-even point to recover the cost of the points in this scenario is 79 months.2
To calculate the break-even point, you divide the cost of the points you purchased by how much you save on the monthly payment. You can also use a mortgage points calculator if you’re unsure.
When deciding if you should purchase points, you consider how long you plan on owning the home. If you have a fixed-rate mortgage, for example, buying discount points may be more sensible if you plan to keep the home past the break-even point.
Other Considerations fir Your Mortgage Term
Here are a few of the more commonly asked questions regarding mortgage points, mortgage terms and rates. Find more in 19 Confusing Mortgage Terms Deciphered.
Are Discount Points Tax Deductible?
You may be able to deduct discount points you purchase from your taxes as home mortgage interest. If you can deduct all your interest this tax season, then you may be able to deduct the total amount of your discount points as well.
Should I Pay Off My Mortgage or Invest the Money?
If you plan on entering retirement, it’s best to pay off your large debts. In this case, a 15-year mortgage loan may be the right choice because it allows you to pay your loan off sooner and save the money for retirement.
Can I Save Money Making Extra Mortgage Payments?
Paying off your mortgage loan faster by making additional payments is a way to pay down the debt faster. But if you can afford extra each month, you may want to consider refinancing your loan to a 15-year mortgage instead.
Is It Harder to Qualify for a 15-Year Mortgage Loan?
If you have a higher income that proves you can afford the higher payments associated with a short term mortgage loan, then it’s easy to qualify. You may also find interest rates that are between .5 and 1% lower than they are for a 30-year mortgage.
What’s The Average Mortgage Rate?
What Mortgage Rates Can I Get with My Credit Score?
The higher your credit score, the better the interest rate you can get for your mortgage loan. Your credit scores are one of the most important factors mortgage lenders consider when determining if you qualify. A good credit score to purchase a home is above 620.
Keep in mind that to qualify for the best interest rates on a mortgage—which has a big impact on your monthly payment—you need a great credit score as well. You can check your credit score for free on Credit.com and you get free credit report card too.
This article was last published December 11, 2017, and has since been updated by another author.
1 Based on calculations done at https://www.mortgagecalculator.org/ with no added property tax, PMI, home insurance or HOA fees.
2 Based on calculations done at https://www.money-zine.com/calculators/mortgage-calculators/mortgage-points-calculator/.