The 30-year mortgage is the poster product of home financing. Many people grew up in a home financed by one, and many are living in such a home currently. The 30-year home loan is so ubiquitous that many who are in the market for home financing simply assume that a 30-year term is right for them, even if that may not be the case. While the 30-year mortgage is popular for a reason – long loan terms mean lower monthly payments and more budget flexibility – a 15-year mortgage may be a better fit for some borrowers. Here are some advantages of a 15-year home loan that you should consider when selecting your mortgage term.
Saving big on interest
The biggest advantage of a 15-year mortgage is the substantial savings on interest over its 30-year cousin. A 30-year mortgage for $200,000 at 4.00%/4.05% APR would require $343,739 in payments while a 15-year loan at the same amount would cost $266,288 to pay off at 4.00%/4.09% APR. That’s a savings of $77,451 – nearly 40% of the original loan amount. Taxes and investment opportunities complicate that math*, but if you stick to your plan with a 15-year loan, the savings are straightforward and guaranteed.
Building equity and paying off debt faster
This math is much simpler: with a 15-year mortgage, you’ll own your home in half the time of a 30-year loan. The faster equity accumulation makes a home equity line more useful should you desire to open one in the future. And of course, it also means you’ll reach the milestone of debt-free homeowner that much sooner – an important intangible benefit for some people.
Enforcing better budget discipline
The biggest downside of a 15-year mortgage is the higher monthly payments. That $200,000 loan at 4.00%/4.09% APR would come with a $955/month payment through a 30-year mortgage but a $1,479/month payment with a 15-year term. That disadvantage may be a positive in one regard. The tougher budgeting requirements that come with a 15-year loan can force you to prioritize affordability when shopping for your home and necessitate a lean budget once you’re paying your loan. Stick to those habits once you’ve paid off your mortgage, and the monthly amount you can commit to savings or investment will be substantial.
15-year mortgages aren’t for everyone. Their higher monthly payments may be too big a burden for some, and the benefits of mortgage interest deductions and investment opportunities may tilt the scale toward the 30-year mortgage* in certain situations. However, if you can afford the steeper payments, the mortgage road less traveled may deliver you some substantial benefits with the 15-year loan.
*Draper and Kramer Mortgage Corp. does not provide tax or investment advice. Consult an appropriate professional in those fields for guidance on your specific situation.