What is a 15-year fixed mortgage?
The pros and cons of a 15-year fixed mortgage
As with all mortgage options, a 15 year mortgage comes with many pros and cons. Depending on the state of your finances, this mortgage could be a great option. But in some cases, this is not the right solution.
Ultimately, you’ll have to weigh the pros and cons to decide if a 15-year mortgage is right for you.
Benefits of a 15 year mortgage
Let’s start by taking a closer look at the benefits of this loan option.
- Fewer interest payments: The overall borrowing cost of a 15-year home loan is lower than that of a 30-year loan. This is because the shorter loan term means less accrued interest.
- Lower interest rates: Lenders offer lower interest rates for this fixed rate mortgage because the shorter loan term means less risk for lenders. A slightly lower interest rate can result in big savings over the life of the loan.
- Faster payment: Debt is not something anyone wants to have in their life. The compressed schedule of a 15-year mortgage eliminates that debt from your life in less time.
- Faster Fairness: As you pay off this relatively short mortgage, your payments will begin to build your principal faster. Eliminating debt and increasing equity can help stabilize your financial outlook.
The most notable benefits of a 15-year mortgage are lower interest payments over time. As a borrower, this could save you thousands of dollars over the life of your loan. Plus, you’ll be able to wipe that debt off your books as soon as possible.
Disadvantages of a 15 year mortgage
Of course, there are downsides to keep in mind when considering a 15-year mortgage. Here’s what to look for.
- Higher monthly payments: The most obvious downside of a 15-year home loan is the higher monthly mortgage payments. With the compressed schedule, you will have a larger mortgage payment each month.
- Small home budget: If you’re stuck with a higher monthly payment, it could lead to a limited budget for your new home. Lenders want to make sure you can afford the monthly payment. Thus, they will not be willing to lend as much if the monthly payment is higher.
- Less leeway: When your mortgage payment takes up a larger share of your monthly budget, there is less room for other necessary expenses in your budget.
- Missed savings opportunities: Paying off your mortgage isn’t your only financial goal. But with the higher monthly payment, you’ll miss an opportunity to save for other financial goals. For example, you may not be able to save as much for retirement if your mortgage payment eats up most of your monthly budget.
A 15-year mortgage could be the right decision for your finances. But in many cases, sticking with a 30-year mortgage is a smart move.
If you’re not quite sure you can stretch your budget to the 15-year loan term, there’s nothing wrong with choosing a longer loan term. And don’t forget that you can always make extra payments to pay off your mortgage debt faster.
Take the time to analyze the figures of your own situation to decide between a 15 and 30 year mortgage.