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The Pros And Cons Of A 15 Year Mortgage – The Expert Overview

The Pros and Cons of a 15 Year Mortgage – The Expert Overview

Amanda Byford
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About 15 Year Mortgage

A 15-year mortgage is one of the popular loan terms second to a 30-year mortgage. Some borrowers opt for the 15 year mortgage because it saves them a significant amount of money in the long term.

The market today is filled with several types of mortgage products. The 15 year mortgage has its own set of advantages and disadvantages in comparison to the 30-year. 

While both the products share similarities, the interest rate can be impacted by the borrower’s credit history and credit score.

Timely payments, length of credit history, and how many open credit accounts are the factors that determine the credit score, which is a numerical representation of how likely a borrower will pay back money owed. 

Both a 15 year and a 30-year loan require adequate monthly income to cover the potential mortgage payment and other debts.

Pros of a 15 Year Mortgage

Both the 15-year and 30-year mortgages have fixed rates and fixed payments over their terms.

Let us look at the advantages of a 15-year mortgage against a 30-year.

The total interest is less

Since the total interest payments of a 15-year mortgage are less than a 30-year mortgage it would cost less in the long run. 

The cost of a mortgage is calculated on an annual interest rate and as you’re borrowing the money for half the term, the total interest paid will also be lower than what you’d pay over 30 years.

Lower Interest Rate

Short-term loans are considered less risky and cheaper by banks to fund compared to long-term loans, hence a 15-year mortgage comes with a lower interest rate. 

Compared to a 30-year mortgage these rates can be anywhere between a quarter-point to a whole point lesser.

Government-sponsored companies

If the mortgage is purchased by Fannie Mae, one of the government-sponsored companies, you will end up paying less in fees for a 15-year loan. 

Fannie Mae and the other government-backed enterprises charge loan-level price adjustments for 30-year-mortgages.

These fees are applicable to borrowers who have lower credit scores and make smaller down payments. 

A lower mortgage insurance premium is charged to 15-year borrowers by the Federal Housing Administration (FHA). 

Lenders require PMI when you put a down payment that is smaller than 20% of the home’s value. 

PMI protects the lender in case you default on the payments. It is charged as a monthly fee added to the mortgage payment, and it ceases once you pay off 20% of your mortgage.

Compulsory Savings

Financial planners consider a 15-year mortgage a type of forced savings as the monthly payment is higher for a 15-year mortgage. 

So instead of taking the monthly savings from doing a 30-year and investing the funds in a money market account or in the stock market, you’d be investing it in your house, which over the long run is likely to appreciate.

Cons of a 15 Year Mortgage

Even after the interest saved with a 15 year mortgage, borrowers should consider a few disadvantages before plunging into the term.

Higher Monthly Payments

As the  15-year mortgage loan needs to be paid off in half the time it has a higher monthly payment than a 30-year. 

For instance, a 15-year loan of $250,000 at 4% interest will have a monthly payment of $1,849 against $1,194 for the 30-year. 

So the 15-year monthly payment is about 55% higher than the 30-year for the same amount at the same rate.

Less Affordability

Because of its higher payment, the buyer might be limited to a more modest house than they would be able to buy with a 30-year loan. 

With the same example mentioned above, if the mortgage lender will only approve a maximum of $1,500 per month. 

The borrower would need to buy a house that is cheaper a $200,000 mortgage at 4%, for 15-years, turns out for a payment of $1,479.

Whereas a 30-year loan would result in a $1,194 monthly payment that is under the $1,500 limit approved by the lender, the 30-year loan might allow the borrower to buy a larger home or take on a bigger mortgage. 

So a 30-year mortgage for a $300,000 home would cost $1,432 per month, which too is under the $1,500 maximum and allows you to take on a larger loan by getting a bigger home or a better location.

Less Money Going to Savings

The higher payment requires higher cash flow and one year’s worth of income in liquid savings. 

The higher monthly payment means a borrower would have to let go of the opportunity to build savings or save for goals like college tuition for a child or his retirement.

Conclusion

Like a 30-year mortgage a 15-year mortgage, too is a home loan having the same interest rate and monthly payment for the life of the mortgage. 

Depending on your financial situation and goals you can decide if you want to opt for a fixed 15-year or 30-year mortgage.

A homebuyer can save significant money over the length of the loan with a 15-year mortgage because the interest paid is less than in a 30-year mortgage. 

Refinancing into a 15-year mortgage when you are halfway through your 30-year mortgage, may lower your interest payments while still paying off the loan in the expected amount of time.

Because in a 15-year loan the payments are significantly higher, if buyers cannot keep up with the payments due to loss of job or change in income they risk defaulting on the loan.

Amanda Byford

Amanda Byford has bought and sold many houses in the past fifteen years and is actively managing an income property portfolio consisting of multi-family properties. During the buying and selling of these properties, she has gone through several different mortgage loan transactions. This experience and knowledge have helped her develop an avenue to guide consumers to their best available option by comparing lenders through the Compare Closing business.

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