Many borrowers shy away from 15 year mortgages because of the higher monthly payment which in some cases can be almost twice that of the payment on a 30 year mortgage.
On the other hand, if you want to cut your payment time in half and you have the income to pay the monthly mortgage and still pay other expenses, a 15 year mortgage is worth a look.
What is a 15 Year Mortgage?
15 year mortgages are usually fixed rate mortgage loans with a 15 year term. The fixed rate ensures the interest and principle portion of the monthly payment are the same throughout the full 15 year term. Taxes and insurance are variables that may adjust no matter which mortgage terms you choose.
15 Year Mortgage: The Good
Build Equity Fast
With a 15 year mortgage the payments are more than that of a 30 year mortgage which means that you are paying down more of the principle balance, and in most cases the interest rate is lower on that payment.
The risk to lenders on 15 year mortgages is much less, so they can offer lower interest rates. Additionally, since the term is half that of a 30 year mortgage, it's a less expensive option over the long term.
Full Ownership Faster
For some people owning a home free and clear is the ultimate goal and a 15 year mortgage puts that goal within reach in half the time.
15 Year Mortgage: The Bad
With a shorter term, the payments will ultimately be higher. Taxes and insurance will also be included in the payment and over time this commitment needs to make sense financially for you. It is important to consider emergency savings and a budget for your lifestyle, because the only way to change or discontinue the loan would be through a refinance or sale.
Keep in mind that down payment heavily affects the monthly payment, so if you plan to put down less than 20% it's important to really crunch numbers to make sure that this payment will definitely work in the long term.
Limited Access to Equity
Though you will be building equity twice as fast, remember that equity will be locked into the property. Short of a Cash Out Refinance, Home Equity Loan, or Sale, it is not easily or readily accessible for use.
Less Liquidity Overall
If you choose to make larger monthly payments with a 15 year mortgage and further, if you put a significant amount of money down, the money used for the mortgage can't be used for other things. For example, you may have less money to invest in retirement or other high yield investments. This is called opportunity cost.
Lower Qualification Amount
Don't be surprised that you qualify for less if you elect to go with a 15 year term mortgage. Lenders use the new housing payment, current debts, and current income when calculating debt to income ratios. A higher payment from the 15 year mortgage could mean that you qualify for less depending on your income.
Would a 15 Year Mortgage Work For You?
15 year mortgages are great for people looking to have a fully paid asset, reduce debt, and have the security and financial freedom that comes with those factors.
This type of loan works well for those who can afford to make the commitment over the long term. For those whose income may vary or whose income is not stable it may not be a good option since the mortgage payment will be a fixed payment in your budget that will required regardless of circumstances, until is paid off.
Please Note: This article is provided for illustrative purposes only. It is not an offer or commitment to lend money, and it is not an advertisement for a specific mortgage or a specific interest rate. Contact me to run the numbers for your situation.