A 15-year mortgage allows borrowers to finish paying off their homes in half the time and at a lower overall cost than a 30-year loan. The catch? You’ll have a higher monthly mortgage payment.
The higher payments means a 15-year mortgage won’t be affordable for everyone, but it can be the right move for some.
What is a 15-year fixed-rate mortgage?
With a 15-year fixed-rate mortgage your interest rate will remain the same throughout the loan term.
One of the main benefits of a 15-year mortgage is that you’ll likely qualify for a lower rate than you would with the more popular 30-year fixed-rate mortgage. A lower rate, combined with the shorter payback time, can save you thousands of dollars in overall borrowing costs.
The Achilles heel of 15-year mortgages is that your monthly payments will be higher than on similarly sized 30-year loan. But, if you can afford the monthly expense, you could be debt-free quicker and pay less interest over time.
The pros & cons of 15-year mortgage
15-year vs. 30-year mortgage loans
A 30-year fixed-rate mortgage is the most popular type of home loan in America, because the long repayment period results in significantly lower monthly payments. Having a lower mortgage payment could help you save for other goals, such as home renovations or retirement. However, with a 30-year fixed mortgage, you’ll pay a higher interest rate compared to a mortgage with a shorter term.
For instance, with a $200,000 30-year mortgage with a fixed rate of 3.5% (roughly the average 30-year rate in early 2022) your monthly payment would be $898 and you would pay $123,311 in interest by the end of your loan term.
A 15-year fixed-rate mortgage works a lot like a 30-year fixed. However, since you’re paying off the loan quicker, you’ll build home equity faster and likely qualify for a lower rate. The drawback of a 15-year mortgage is that payments will be much higher, and you may have less wiggle room to save and make other investments.
If you had a $200,000 15-year mortgage with a fixed rate of 3% (roughly the average 15-year rate in early 2022) , you’d pay $1,381 per month and a total of $48,609 in interest over the life of your loan.
That’s $74,702 less total interest than on a 30-year, but $483 more per month.
15-year mortgages vs. 5/1 ARMs
Like 15-year mortgages, 5/1 ARMs (adjustable rate mortgages) initially feature lower interest rates than popular 30-year loans. However, 15-year and 5/1 ARM work very differently. With a 5/1 ARM, your rate will be fixed for the first five years of …….