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The Pros and Cons of a 15 Year Mortgage

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So, congratulations are in order!…you’ve made the decision to join the ranks of millions of other happy homeowners. Careful spending and diligent saving strategies secured the down payment and months of house hunting finally led you to the perfect spot. Now, you are ready at last to make what will likely be the largest single purchase of your life. But hold on!-there’s one more big choice to make! 

Which type of mortgage will be right for your unique set of financial circumstances and allow you to meet your future goals? Although mortgage programs that spread monthly home loan payments out over 30 years have traditionally been viewed as the safest choice, they may not always be the best for everyone. For example, those that choose the lower pressure of a 30 year mortgage also pay a hefty price in interest payments. 

Here is a hypothetical example from the blog, GetRichSlowly.org:

Two sets of borrowers purchase homes for $160,000. One chooses a 30-year mortgage that has a 5 percent interest rate. The other opts for a 15-year mortgage with a 4.5 percent interest rate. (Please note that this example does not include taxes and insurance, which are variable based on a variety of factors). 

For the 30-year mortgage, the average monthly payment would be $859. At 5 percent, $149,211 would be paid towards interest and a total of $309,211 would be paid for the life of the loan. 

The 15-year mortgage option would require a monthly house payment of $1,224. Interest charges would add up to $60,318 and the entire loan would cost $220,318. 

As you can see when you compare the numbers, in the 15 year mortgage scenario, the total interest and the total cost of the loan is significantly less than the costs associated with the 30 year mortgage. Not to mention the fact that the loan gets paid off in half the time.

While it’s a fact that spanning your mortgage out over a 30-year period creates more of a safety net in the long run, paying off a home loan in 15 years would open the door to financial freedom. Of course, every situation is unique, and there are many prospective home buyers that may not be able to handle the shorter-term loan scenario as easily as others. Choosing which path is truly right for you takes careful examination and consideration. 

If you have explored the options and are still unsure, it is a good idea to go over your plans with a professional. Consulting a financial planner and experienced mortgage lender can help you make the right choice. In the meantime, here are a few more pros and cons for a 15 year mortgage: 

Pros 

  • Do not confuse this shorter term loan with an adjustable rate mortgage or ARM. Just as with the traditional 30-year home loan, a 15-year mortgage comes with a fixed interest rate. Make sure to do your research and lock in on the lowest one possible! You’ll also have the choice of refinancing to a lower interest rate, should they drop. 
  • Although the responsibility of a larger monthly payment may be intimidating, having the ability to own your home sooner is a huge plus. Compare a 30-year commitment to just half that time period! Imagine owning your home free and clear by the age of 45 or even younger. That could be just in time to speed up  cash flow for a few college tuitions, vacation home or early retirement! 
  • As they make a larger house payment each month, homeowners with a 15-year mortgage are also able to build up their home’s equity more quickly. That’s because holders of such loans are paying off more of the interest on the loan sooner than those with longer-term loans. 
  • Typically, interest rates for 15-year mortgages are always a little bit lower as opposed to the 30-year option. 

Cons 

  • Higher monthly payments 
  • The financial commitment of a shorter-term loan could prevent you from building up assets. Although you could accumulate more home equity with a 15-year loan, you could also be strapped for cash and become “house poor.” 
  • A change in your employment or personal situation could drastically impact your finances and endanger your ability to make the more expensive payment that a 15-year mortgage establishes. Could you juggle a 15-year mortgage if you or your spouse became unemployed or ill? Do you have aging parents or college age children to consider? 

In reviewing these pros and cons, be realistic and carefully consider both the best and worst-case scenarios, before making that final big decision!

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