15-Year Fixed Rate Mortgages
Have you ever considered the option of a 15-year fixed mortgage? There are few home buyers that actually consider this option, but the numbers have increased in recent years.
It's true that 30-year fixed mortgages are still the most popular choice among home buyers, but with a 15-year fixed, you could save big.
In this post, we'll go over the advantages and disadvantages of a 15-year fixed mortgage and why you should consider one.
Advantages of a 15-Year Fixed Mortgage
15-year fixed mortgages have a few advantages over 30-year fixed mortgages. Let's look at some of these here:
- Lower Interest Rate – The interest rate is usually lower on a 15-year than a 30-year loan. Why? One reason is this: 15-year fixed mortgages assume less risk. They are typically 0.25%–1% less than a 30-year fixed mortgage.
- Save Money in the Long Run – In a 15-year fixed mortgage, you are only borrowing money for half as long. Since mortgages are charged an annual interest rate, you'll save a lot more on interest in the long run. Think about it—you're being charged more in interest on a 30-year fixed than on a 15-year fixed since the term is a lot longer. It makes sense, right? Plus, you'll get out of debt a lot faster when you do a 15-year fixed mortgage.
- Build Equity Faster – You build up equity a lot faster with a 15-year because you are paying more on the principal each month.
- Quicker Route to Full Homeownership – This can be a liberating thought. Everyone loves the idea of having something completely paid off. So the shorter the term, the quicker you become a full owner.
Disadvantages of a 15-Year Fixed Mortgage
Now let's look at some drawbacks of 15-year fixed mortgages compared to 30-year mortgages:
- Higher Monthly Payment – Shortening the term will make your monthly payment higher because you'll be paying more principal each month.
- Not Able to Save as Much Money – Because of its higher payments, a 15-year can divert your income from other savings plans. But this also gives you something to think about, helping you weigh your options. Would it be better to pay your house off faster and not have to pay as much interest? You can think about your financial goals and determine what's best for you.
- Qualify for Less – You might not qualify for as much with a 15-year fixed mortgage than you would with a 30-year mortgage.
Is a 15-year Fixed Mortgage Right for You?
Only you can answer this question. Analyze your lifestyle and think about your financial goals for the future. Are you flexible enough to make the higher payments each month? Is paying off your house your top priority?
Let's recap: If you decide to go for the 15-year fixed, your monthly payment will be higher than it would be with a 30-year fixed. But most of that payment goes toward your principal balance rather than interest, whereas the 30-year mortgage requires a lot more interest.
Thinking in these terms, you'll pay off your mortgage in less time (15 years if there are no late payments), and in the long run you will save a lot in interest.
Comparing the Cost of a 15-Year & 30-Year Mortgage
Using simple numbers, let's look at a quick example so we can see how the numbers break down. We'll compare a 15-year mortgage with a 30-year mortgage, using a loan amount of $200,000.
30-year Fixed Mortgage:
- Interest rate = 4.25%
- Approximate monthly payment = $984 (this excludes insurance and property taxes)
- Total interest paid on life of the loan = $154,197
- Grand total = $354,197
15-year Fixed Mortgage:
- Interest rate = 3.25% (lower interest rate with the 15-year)
- Approximate monthly payment = $1,405 (excluding insurance and taxes)
- Total interest paid on life of the loan = $52,961
- Grand total = $252,961
So, even though the monthly payment on the 15-year mortgage is higher, you save $101,236 in interest overall. This example was created with an amortization calculator. Crunch some numbers to see for yourself.
Of course, this is just an example to demonstrate how much you can save on interest. Talk to a mortgage professional for more details and to see what works best for you.
The 15-year fixed mortgage is often thought of as a forced savings account. You dedicate yourself to paying off your home as quickly as possible, even though it can take away from other savings during that time. And while it may not fit everyone's needs, it's still worth considering.
Being debt free is liberating, and the 15-year fixed mortgage one of the fastest options to get there. But to find what will be best for your situation, explore your options and think about what you want to achieve.
To speak with one of our loan officers, contact us at Elevate Mortgage at 801-895-7230. Even if the 15-year mortgage isn't the right fit, you can discuss your financial goals with our loan experts to help decide what option is best for you.