Home > Mortgages > A 15-Year Mortgage Can Save You $190K … But Can You Get One?

Comments 1 Comment

You may wonder, Is a 15-year fixed mortgage worth it? Our answer: absolutely. It’s one of the best ways to eliminate your mortgage debt, and you can save thousands on interest payments.

For instance, consider the staggering difference between a 30-year mortgage and 15-year mortgage, both for $400,000. At an average of 4% interest on a 30-year mortgage, you’ll pay an extra $287,487 over the life of the loan. But with a shorter 15-year mortgage, you’ll pay only $97,218 of interest. That’s a shattering savings of $190,269!

We’ve listed a handful of pros and cons for getting a 15-year mortgage instead of a 30-year mortgage, and we’ll also discuss how to determine if a 15-year home loan is a smart move for you.

Pros and Cons of 15-Year Mortgages over 30-Year Mortgages

Pros

+ Faster to pay off

+ Less accumulated interest

 

Cons

– Higher monthly payments

– Decreased mortgage interest tax deduction

 

Should I Get a 15-Year Mortgage?

The concept of the 15-year mortgage for most is I’m going to bite, chew, and claw my way through a short-term, higher mortgage payment to get to a brighter future.

In today’s interest rate environment, a 15-year mortgage has undeniable mass appeal. We’ve already discussed the difference in interest costs between 30-year and 15-year mortgages. But you should also consider what being mortgage-free will mean for your future.

Consumers who are in a financial position to handle a higher loan payment—while continuing to grow their savings—are well-suited for a 15-year mortgage. Some people whose income is poised to rise or whose debt will soon decrease are also good candidates for a 15-year loan.

A specific demographic that can benefit significantly from a 15-year mortgage is those who will retire in under 30 years. Carrying a mortgage into retirement isn’t ideal. So these consumers might opt to pay off a mortgage faster than someone buying a house for the first time.

To sum it up, consider a 15-year mortgage if any of the following apply to you:

  • You don’t want this debt hanging over you in the future.
  • You have a strong income.
  • You will soon see an increase in income.
  • Your debt will soon decrease.
  • You’re planning to retire in less than 30 years.

How Do I Know I’m Financially Ready for a 15-Year Mortgage?

In most cases, you’ll need a strong income for an approval. When you switch from a 30-year mortgage to a 15-year fixed-rate loan, you’ll pay down the loan in half the amount of time. But doing so can also double your monthly payments during the 180-month term—and it can also lower your mortgage interest tax deduction.

So how much income are we talking? Well, your income will have to support the larger carrying costs of a home. And if you have other debts with a monthly payment, like cars, installment loans, or credit obligations, you should factor those in as well.

If you’re interested in a 15-year mortgage but don’t feel financially stable enough to take on the higher monthly premiums, don’t give up hope. There are things you can do to improve your finances to take on a 15-year mortgage.

How Can I Improve My Financial Stability for a 15-Year Mortgage?

There are at least three ways to improve your capacity to take on a 15-year mortgage: pay off your debts, borrow less, and generate extra cash.

1. Pay Off Your Debts

When your lender looks at your monthly income to qualify you for a 15-year fixed-rate loan, part of the equation is your debt load.

For a preview on how they’ll see your application, take your proposed total monthly payment for a 15-year mortgage payment and add that to the minimum monthly payments for all your other consumer obligations. Divide the sum by 0.45.

(total monthly mortgage payment + consumer obligations) ÷ 0.45 = minimum income

This formula will give you the minimum monthly income you’ll need to offset a 15-year mortgage. If you make anything less than that, you probably won’t qualify for a 15-year home loan.

But because your current debt factors into this formula, paying off debt can easily reduce the amount of income necessary to qualify. And getting rid of debt can also cut down how much you need to borrow because you can save up a larger down payment at a faster rate.

2. Borrow Less

Borrowing a smaller home loan is a guaranteed way to keep a lid on your monthly outflow. You’ll maintain a healthy alignment with your income, housing, and living expenses.

Got extra cash in the bank? If you don’t have an immediate purpose for the money in your bank account beyond your savings reserves, use the funds to put down a larger down payment and reduce your mortgage amount.

With a bigger down payment, your monthly payments will be more manageable, so you’ll pay less in interest expenses over the life of the loan. Borrowing less and putting down a larger down payment are great ways to make your money work for you.

3. Generate Extra Cash

Accessing additional cash can improve your financial situation. Do you have assets like stocks you can sell or a money-market fund you can trade out of? With extra money, you can pay off debts or apply for a smaller mortgage—as we discussed above.

You can also get additional funds from selling another property. If you have a property you’ve been planning to sell, like a previous home, any additional cash generated from selling that property could put you in a better position when moving into a 15-year mortgage.

What Alternative Options Are There?

Borrowing a 15-year home loan isn’t realistic for everyone. You may want to consider a 25-year or 20-year mortgage as an alternative option.

Another school of thought is to simply make larger payments on a 30-year mortgage every month. This is a fantastic way to save substantial interest over the term of the loan, since larger-than-anticipated monthly payments will go to your principal payments, so you’ll owe less in interest in the end. You can even start with a 15-year mortgage and refinance your home at a later date to a 30-year home loan should your finances change.

Keep in mind that to qualify for the best interest rates on a mortgage (which will have a big impact on your monthly payment), you need a great credit score as well. You can check your credit scores for free on Credit.com every month, and you can get your credit report at no cost to you.

Image: StockRocket

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • SB

    Is it always good to pay cash for a home if one can?

Certain credit cards and other financial products mentioned in this and other sponsored content on Credit.com are Partners with Credit.com. Credit.com receives compensation if our users apply for and ultimately sign up for any financial products or cards offered.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.



Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team