The 15-year mortgage: Pros and cons of this home loan option

The interest rate will be lower on a 15-year mortgage because the lender is only being exposed to 15 years of risk instead of 30 years.

A 15-year mortgage is a great way to pay off your mortgage in half the time while also saving yourself tens of thousands of dollars in interest payments. The downside to the shorter mortgage is the fact that your mortgage payment will most likely be close to 50 percent higher than a 30-year mortgage.

Roughly one in six conventional mortgages is for a 15-year term and this is possibly due to the fact that the average monthly payment on a 15-year mortgage is $1,650 a month compared to $1,100 for a more conventional 30-year term.

What is a 15-year Mortgage?

The majority of 15-year mortgages are fixed rate, which means that your payment will remain the same throughout the life of the mortgage and if you make all of your payments on time the mortgage will be completely paid off in 15 years. The cost of taxes and your homeowners insurance can vary over the course of the mortgage.

Now that we are clear on what exactly a 15-year mortgage is we can now look at the pros and cons of this particular type of payment schedule.

Pros of a 15-Year Mortgage

There are a number of pros to the 15-year mortgage, the main one being all of the money you will save. Here is a quick overview of the benefits of a short mortgage. 

• Saving Money: One of the biggest factors in choosing a 15-year mortgage is how much money you will save on interest payments. In most cases, the interest rate will be lower on a 15-year mortgage because the lender is only being exposed to 15 years of risk instead of 30 years.

While it will vary by lender, going with a 15-year mortgage can result in a half to three-quarter point difference on the interest rate compared to a 30-year mortgage. In addition to scoring a lower interest rate, a 15-year mortgage results in a huge savings because you are paying interest for only half of the time you would with a standard mortgage.

As an example, if you have a $300,000 fixed rate mortgage with an interest rate of 4 percent your monthly mortgage payment would be $1,432 and you would end up paying a total of $215,609 in interest with a 30-year mortgage.

On the other hand, with the same parameters, a 15-year mortgage will result in a $2,219 monthly payment and a total interest amount of only $99,431, which is a savings of $116,178.

• Quicker Ownership: If your goal (and who’s isn’t) is to own your home free and clear as well as ditch your monthly mortgage payment a 15-year mortgage lets you achieve that goal twice as quickly.
• Quick Equity: You will build equity in your home twice as quickly as more of your monthly payment will be going towards the principal of your mortgage instead of interest. This equity can come in handy if you need to pull some money out of your home.

Cons of a 15-Year Mortgage

On the other side of the coin, the main downside to the 15-year mortgage is the much higher monthly payment you will face.

• Higher Payment: Your monthly payment won’t double but it will more than likely be at least 50 percent higher than the payment on a 30-year mortgage. This can put a major dent in your family budget. In addition to the higher payment you will still need to fork up for property taxes, insurance and possibly mortgage insurance if you had less than a 20 percent down payment.

While you may be able to swing it, make sure you don’t find yourself house poor and struggling to cover your monthly bills. Being house poor can quickly become a serious issue if you have an emergency and can’t afford to cover it.

A 15-year mortgage is certainly shorter than a standard one, but it is still a lengthy commitment so if you are unsure of your future finances it may be best to stick to a 30-year mortgage.

• Lost Opportunities: Since more of your monthly budget will be tied up in your mortgage payment, you have less money to invest in the stock market or to sock away in your 401k.
• Equity is Locked Up: You will be building equity quicker but that money is locked up in your home unless you sell your home or you take out a home equity loan.
• Fewer Tax Advantages: If you depend on the mortgage deduction to lower your taxable income, you will be giving this up twice as quickly compared to a 30-year mortgage. However, losing your monthly mortgage payment will probably make this loss a little easier to swallow.

The Bottom Line

A 15-year mortgage can be a great tool and will lead to quicker homeownership but being able to truly afford it is key. In addition to covering your mortgage payment you will want to save for retirement, college educations for your children as well as afford everyday life.

Before signing on the dotted line carefully review your budget and make sure you can absolutely afford the higher payment and it fits into your long-range plans. If you have any doubts about your financial future or have major expenses coming up, sticking with a 30-year mortgage may be the best option.