The pros of a 15-year, fixed-rate mortgage
SHORTER PATH TO FULL HOMEOWNERSHIP
Owning a home free and clear is a goal that burns bright for many people. What matters most to them is a feeling of safety from knowing that their home is fully paid off.
BUILD EQUITY FASTER
A 15-year mortgage, with its lower interest rate and higher payment amount, builds equity faster because you pay down the principal balance quicker.
Lenders are exposed to fewer years of risk on a 15-year mortgage, so they charge a lower interest rate. “That could mean, depending on the institution, a rate that’s anywhere from a half percent to three-quarters of a percent lower than for a 30-year, fixed-rate mortgage,” says Carlos Miramontez, vice president of mortgage lending at Orange County’s Credit Union. A 15-year mortgage also is cheaper because you pay interest over half as many years as with a 30-year mortgage. Compare the principal and interest — not including homeowners insurance, property tax or private mortgage insurance — for $250,000 mortgages at current interest rates:
EXAMPLES BELOW ARE NOT AT CURRENT MARKET RATES****
$350,000 Purchase with 10% down
- A 30-year fixed-rate mortgage at 4.5% has monthly payments of $1,596 and a total interest cost of $609,582
- A 15-year fixed-rate mortgage at 4.5% has monthly payments of $2,410 and a total interest cost of $468,751 — a savings of $140,831 if you kept the loans for their entire terms
The main draws of 15-year fixed-rate loans are their lower interest rates and the fact that they’ll be paid off more quickly. Like any fixed-rate loan, they also offer stability; the monthly payment won’t change no matter what happens to inflation or market interest rates.
But the monthly payment will be much higher than that of a 30-year loan for the same property due to the shorter term, and that will make it harder to qualify for the loan.
A 15-year, fixed-rate mortgage is a great tool for borrowers who can afford the higher payments while still saving and investing for retirement. Paying off a mortgage gives many people a feeling of independence and safety.
The 15-year has become more popular for those folks whose goal is to own the home free and clear or have debt reduced by a certain time. Typically people use it to refinance, aiming to become debt-free by retirement or free up cash flow for remodeling or to help adult children pay off student loans or buy a home.
Considering a 30-year fixed-rate mortgage
You can likely claim a tax deduction based on interest payments for your 30-year loan, especially in the early years, when most of your payments go toward interest. And because it’s a fixed-rate loan, you’ll pay the same amount every month. If you choose to make larger payments to become debt free sooner typically there are no pre-payment penalties for this. Check with your lender to be sure.
Credit for excerpts from Nerd Wallet Article written Nov. 1, 2017 by Author Marilyn Lewis