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
+ Faster to pay off
+ Less accumulated interest
– 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.