When Should You Pick a 15-Year Mortgage Loan?

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Are you considering a 15-year mortgage loan? There are a number of benefits, including a lower interest rate and the ability to pay off your home much faster. However, it’s important to take into account your unique situation along with the pros and cons of a 15-year mortgage, which we have highlighted here.

Pros of a 15-Year Mortgage Loan:

  • Lower Interest Rate
  • Ability to Pay Your Mortgage Off Sooner
  • Build Equity Quicker

If your vision board for the future has “15-year mortgage” pinned right to the top, you probably already know about the potential savings in interest. It can be substantial. The average interest rate on a 15-year mortgage is typically lower than that of a 30-year mortgage, making it an obvious pro and a reason why many people pick a 15-year. Depending on the price of the home, you could easily save a lot of money in the long run.

Another obvious benefit of a 15-year mortgage loan is that it forces you to save. Because the home acts as an investment to your pocketbook, paying more each month will compel you to spend less and instead put more toward your home.

Shorter-term loans are also great for building equity. Because your monthly mortgage payment will be higher and you are paying less interest, your equity will build quicker.

Cons of a 15-Year Mortgage Loan:

  • Higher Monthly Payments
  • More Cash Reserves Needed
  • Less Cash Available

While saving money in the long run is a definite pro to a 15-year loan, many homebuyers decide against it because of the steeper monthly payments. Higher monthly payments can result in a regimented budget and tight cash flow for the next 15 years. Your money will be going toward your home versus other options, like retirement.

If you want to pay off your mortgage faster than in 30 years, you still can. Just because you have a 30-year rate doesn’t mean you can’t pay it off early, and with a 30-year term, you aren’t locked into the higher payment every month. In the event that money becomes an issue, you’ll feel at ease knowing your mortgage is at a more affordable price. This can help alleviate stress on your personal bank account.

The Bottom Line 

A 15-year mortgage can save you a lot of money. Here’s an example with a mortgage amount of $500,000 with a 20% down payment and loans available at 4.25% for 15 years or 5% for 30 years.

15-Year Loan Summary 30-Year Loan Summary
Rate: 4.25% Rate: 5.00%
Monthly payment (principal, interest): $2,840 Monthly payment (principal, interest): $1,933
Total cost (down payment, principal, interest): $611,187 Total cost (down payment, principal, interest): $795,804

 

As you can see, the collective result of a 15-year loan with a faster fixed repayment schedule and lower interest rate results in big savings compared to a much higher total cost for the 30-year rate. The con, of course, is the higher monthly payment.

If you are considering your loan options and want an expert opinion, please contact our mortgage team. We are here to help. You may also try our mortgage affordability calculators or sign up for a complimentary seminar.

Author Elizabeth Million

Boulder local Elizabeth Million shares advice on home buying and mortgages picked up from the diverse roles she’s served in the real estate industry, including appraisal business owner and mortgage loan officer for Fortune 500 companies. In her current role as VP of Mortgage Lending, Liz has led Elevations to the title of largest credit union mortgage lender in Colorado.

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