Benefits Of A 15-Year Mortgage: Is It Right For You?

Deciding on the right mortgage term is crucial when buying a home. Opting for a 15-year mortgage can come with numerous benefits. But how do you know when it’s a good idea to choose a 15-year mortgage versus a 30-year mortgage? Let's investigate some of the benefits of a 15-year mortgage for those on the journey to finding their dream home.

What’s A 15-Year Mortgage?

Similar to a 30-year mortgage, a 15-year mortgage has a set term and is a type of a fixed-rate mortgage. You can use these mortgages to buy a home or refinance an existing mortgage. Qualifying borrowers can access 15-year mortgages through the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), U.S. Department of Agriculture (USDA) and conventional loans.

A 15-year fixed-rate mortgage has an interest rate that stays the same from closing to the end of the loan. This means your monthly principal and interest mortgage payment remains constant, making it simpler to manage your budget. Over the 15-year term, you make monthly payments, and by the end, you've fully repaid the loan.

Pros And Cons Of A 15-Year Mortgage: At A Glance

Just like any other home-related decision, there are some pros and cons of a 15-year mortgage.

Benefits Of A 15-Year Home Loan

Even though there can be cons to choosing a 15-year home loan, it also offers several financial advantages for prospective homeowners.

Lower Interest Rates

Shorter loan terms usually offer lower interest rates. Your choice of mortgage term, whether it's 30 years or 15 years, plays a role in determining your mortgage interest rate. In general, longer loan terms result in higher rates and higher total interest payments. However, regardless of the loan term, fixed rates protect mortgages from market fluctuations.

Less Interest Over Time

Less time means less interest paid over the life of a loan. Let's look at an example to show the difference in total interest paid over the life of a 15-year mortgage compared to a longer-term mortgage.

• Loan amount: $300,000
• Interest rate: 5%
• $10,000 down payment

15-Year Mortgage:

• Monthly payment: $2,293
• Total payments over 15 years: $422,794
• Total interest paid: $122,794

30-Year Mortgage:

• Monthly payment: $1,557
• Total payments over 30 years: $570,442
• Total interest paid: $270,442

In this example, while the 15-year mortgage has a higher monthly payment, the total interest paid is significantly lower compared to the longer-term 30-year mortgage. This shows the cost savings associated with a shorter loan term. Keep in mind that interest rates and loan amounts can vary, so it's important to consult with a mortgage professional for specific calculations based on your situation.

This example also assumes the same rate for a 30-year and a 15-year mortgage. Considering that 15-year mortgages usually have lower rates than 30-year mortgages, the difference in total interest paid is likely higher than our example.

Faster Equity Accrual

Your mortgage principal is the initial loan amount you borrow from your lender when obtaining a mortgage. Each month, a portion of your mortgage payment goes toward your principal balance. It's important to note that the principal starts accruing interest right after you close on your loan.

Over time, your home equity will accumulate. Home equity is the difference between your home’s value and your remaining mortgage. If your home is valued at $250,000, and your remaining mortgage balance is $150,000, you presently have $100,000 in equity in your residence.

However, home equity isn't always a straightforward dollar-to-dollar calculation. Various factors, such as your down payment, loan balance and the overall market value of the home can influence the total amount of your home equity. If you didn’t make a 20% down payment, reaching the 20% equity threshold can lower your payment by removing private mortgage insurance (PMI), if you have a conventional loan.

Earlier Payoff

A 15-year mortgage leads to earlier debt payoff. Since you’ll pay your debt over 15 years rather than 30, you can enjoy the benefits of being debt-free sooner. This can mean building equity faster and reducing the amount of interest you’ll pay. It can also allow you to do things like invest and save money.

Build Financial Health

Paying off a 15-year mortgage encourages disciplined financial habits and planning. While you’ll be paying less overall, you’ll be paying more per month in a shorter time period. A short-term mortgage will require some budgeting, but the long-term benefits of good financial health and money management can be worth it.

Drawbacks Of A 15-Year Mortgage Loan 

Despite many advantages that come with 15-year mortgages, they may not be for everyone. Let's explore some drawbacks of the 15-year fixed-rate mortgage.

Larger Monthly Payments 

The primary downside for many borrowers considering a 15-year mortgage is higher monthly payments. Despite the lower interest rates, these mortgages require more substantial monthly expenses. This is due to the shorter repayment period, essentially paying off the house in half the time compared to a 30-year loan. Affording these higher payments becomes a crucial factor in budgeting for borrowers.

Smaller House Budget 

A larger monthly payment can limit a buyer’s house budget when looking for a property to purchase. While you may be approved for a $300,000 home, your monthly payment may be limited by your mortgage lender. With a larger monthly payment for a 15-year mortgage, you might be pushed over that limit and forced to choose a less expensive home.

Who Should Get A 15-Year Mortgage? 

Choosing between a 15-year mortgage and a 30-year mortgage depends on your financial circumstances, including your credit score, history, down payment and desired monthly cash reserves. If you have enough monthly cash and want a faster home payoff, a 15-year mortgage might be more suitable.

On the other hand, a 30-year mortgage could be preferable for those with a tighter budget, seeking to pay less monthly toward the mortgage over an extended period. Every borrower’s financial situation is unique, so you should consult an accountant or mortgage professional to determine what’s best for you and your financial situation.

Should You Refinance To A 15-Year Mortgage?

There are several things to consider before refinancing to a 15-year mortgage, including:

• Affordability and budgeting considerations
• Building savings and emergency funds
• Long-term financial goals

Refinancing to a 15-year mortgage is beneficial as long as you can afford the higher monthly payments. Borrowers can take advantage of lower interest rates, a shorter loan term and the possibility of freeing up their income sooner for other investments.

The Bottom Line

A 15-year mortgage can benefit you with lower interest rates and much less total interest paid on your mortgage. However, it can also result in higher payments, making it less feasible for some borrowers.

Every situation is different, and you should do some research and talk with a mortgage lender to find out if a 15-year mortgage is right for you. If you’re thinking about a 15-year mortgage, start on a mortgage application today and see what you qualify for.