A 15-year loan is a fixed-rate loan, which means that you’ll pay the same amount each month, and you know what that amount will be when you take out the loan. Regardless of external factors, such as market interest rates or inflation, the loan’s rates will not change. Many people choose 15-year mortgages because they have lower interest rates than 30-year loans and they can be paid off faster. Because a 15-year mortgage has higher payments every month, it is often more difficult to qualify for than a 30-year mortgage.
There are certainly some advantages to getting a shorter-term loan, including:
- Lower interest rates
- Reduced interest payments
- Fast track to home ownership
Of the mortgage structures available, 15-year mortgages have lower interest rates compared to 30-year mortgages. Short-term mortgages have fewer interest payments overall. A 15-year loan is also an optimal choice for building equity more quickly in your property due to the fact that you pay down the principal amount faster. If you do need to sell your home, your mortgage is less likely to go underwater. Short-term loans can also put you on a faster track to home ownership, as you will become the full home owner once you’ve made the last loan payment. Finally, another benefit of a 15-year loan is savings. Lenders face less risk with a 15-year loan compared to a 30-year loan. As a result, they charge you less in interest, and those savings add up. If you buy a home for $250,000 and make a 10% down payment, you’ll pay a total of $57,226 in interest for a short-term loan with a fixed-rate mortgage of 3.13%. In contrast, if you get a 30-year loan with a fixed-rate mortgage of 3.61%, your interest payments will amount to $143,719.
On the flip side, there are some disadvantages to taking out a 15-year mortgage, too.
- Larger payments each month
- Opportunity costs
- Home affordability
Between the interest and principal payments, you’ll pay about 50% more each month for a 15-year mortgage compared to monthly payments for a 30-year loan. That doesn’t include other housing-related expenses such as insurance and property taxes. If your down payment is less than 20%, you’ll also need to account for mortgage insurance payments. Since more money is devoted to monthly loan payments, you’ll have less savings available for other investments like retirement contributions or home upgrades. Finally, you may be more limited in price range for a home if you know that you’ll be making larger payments up front.