If your budget allows, you may want to consider ditching your 30-year mortgage in favor of a home loan you can pay off in half the time.
Pop quiz: Would you like to make half as many mortgage payments and owe thousands less in interest over the life of a loan, all while paying a lower interest rate? If you answered “yes” to any part of that question, 15-year mortgages are worth considering, suggests Justin Arnold, a CFP (Certified Financial Planner) who runs WashPark Capital in Denver, CO. We agree! A 15-year mortgage can make good sense for your situation — and they’re more affordable than ever. If you’re looking at real estate anywhere from Seattle, WA, to homes for sale in Boston, MA, here’s why you should consider this type of mortgage with a shorter payment term.
1. Save more money
Taking out a 15-year mortgage dramatically cuts your home-loan repayment time. The faster you repay the loan, the less in interest you need to pay. This can save you tens of thousands of dollars over the (shorter) life of your loan. A 15-year mortgage also usually offers better interest rates than other loan products, says Debbie Todd, a CPA who runs 1 Hour Impact.
Curious about just how much money you could save? Check out this mortgage calculator and plug in the numbers specific to your situation. You can compare amount of payments, interest rates, and more. Seeing the difference between paying off your mortgage in 15 years versus 30 years could be the motivation you need to consider a 15-year mortgage.
2. Build more equity
When you repay your mortgage faster, you don’t just save money — you build equity in your home faster too. Combine a shorter mortgage term with rising home prices, and you could exponentially grow the amount of equity you have.
This is beneficial for several reasons, especially if you want to refinance the loan down the road. “Since you are paying principal faster with a 15-year note,” explains Therese R. Nicklas, CFP, “you will be building equity faster, making refinancing potentially easier.” With a smaller loan-to-value ratio, the risk you present to your lender will be smaller, so you should have more financial opportunities.
3. Reduce pressure on your monthly budget in retirement
Getting a 15-year mortgage might help if you plan to retire in the next 10 to 20 years. Many people want to downsize before they retire, and that means buying a new home. “Choosing a 15-year mortgage allows you to reduce the strain on your cash flow in retirement,” says Eric Roberge, a financial planner who runs Beyond Your Hammock in Boston, MA.
“You can take advantage of stronger cash flow while you’re working to make the bigger monthly payments that a 15-year mortgage requires and pay off the loan before you retire,” Roberge says. “Then, when you do retire, you won’t have to pull as much out of your savings to cover living expenses since your loan will be gone.”
4. Take advantage of the built-in discipline
Instead of considering 15-year mortgages, some people take out a 30-year mortgage and simply accelerate the payments they make on that loan. They get the benefit of saving money on interest but aren’t tied to the higher monthly payment. But Todd Tresidder, a money coach at Financial Mentor, explains that while this sounds good, the situation isn’t always so simple. “If your intention is to pay off the mortgage in 15 years, then commit to it,” he says. “You may prefer the flexibility of a lower mortgage payment by getting a 30-year loan, and you may honestly have the best intentions to add principal to pay it off in 15 years anyway.” However, many people just don’t follow through with that plan. It’s too easy to fall back on making the smaller, easier payment and using the extra payment money for other purchases instead. “Without the enforced discipline of the required payment, it won’t happen,” says Tresidder. “So just be honest with yourself.”
These are some strong reasons to check out this type of home loan. But how do you decide whether a 15-year mortgage is right for you? Jason Reiman, a financial planner who founded Get Financially Fit!, explains that the best candidate for this type of mortgage is someone who has a strong, consistent, and possibly increasing income to handle the larger monthly payment. He says that people who already have extra cash available at the end of each month — meaning they don’t have consumer debt and already save and invest — can also consider this option.
Financial planner Hermes Conesa points out that even if you have a good income now, it’s important to think about the future before you leap into a 15-year mortgage. “Remember to keep any future goals in mind,” he advises. “Getting married, having children, or any other life event or big purchase that you plan for in the future [on top of the mortgage payment] could cause your budget to feel tight.”
Ready to take advantage of a home loan with a shorter payment term? Here’s what you need to better your chances of receiving approval:
- A good credit score. (Here’s why that matters.)
- A low debt-to-income ratio.
- Enough income to afford the monthly payment (and therefore be able to show that you can reasonably afford to repay the loan in full).
You’ll also want to take a hard look at your budget and make sure you can handle the monthly payments — including the insurance and taxes on the property. If your cash flow can handle the 15-year mortgage and you’re committed to paying off your home loan in that period, the 15-year mortgage is a great option to be debt-free sooner and save money.