So you missed out on last spring's ultra-low rates, those dizzying few weeks when 30-year fixed -rate mortgages could be had at interest rates below 5 percent, an all-time low. But you may have noticed that it's still possible to get one of those ultra-low rates - by locking into a 15-year mortgage instead.
On the surface, the 15-year fixed-rate mortgage seems like a sober-minded, responsible thing to do - you bite the bullet on the bigger monthly payments, pay off your mortgage in half the time, save a ton of money on interest payments and end up owning your home free and clear before your firstborn is even out of high school.
Big difference in monthly payments
But there are downsides as well. The first of these is that the monthly payment is considerably larger on a 15-year loan than a 30 year one. For example, consider a $250,000 mortgage at today's national rates of 5.26 percent for a 30-year fixed-rate loan vs. 4.78 percent for a 15-year one. Using our MortgageLoan.com Mortgage Comparison calculator, we get the following results:
Monthly payments: $1,948 vs. $1,382 = $566 per month more for the 15-year loan
Total payments: $350,721 vs. $497,540 = $146,819 more over the life of the 30-year loan
Total interest paid: $100,721 vs. $247,540 = $146,819 more over the life of the 30-year loan
As you can see, for a loan under these terms, monthly payments on the 15-year loan are more than 40 percent higher than the 30-year loan. On the other hand, your total payments over the life of the loan are almost 30 percent less - a total savings of almost $147,000. That's a lot of money that could be used for other purposes.
Can leave borrowers vulnerable to financial troubles
Even so, many financial advisers recommend that borrowers avoid 15-year mortgages. The main reason is that it locks up more of your money and allows you less flexibility in dealing with unexpected circumstances. A loss of income, unexpected expenses (perhaps medical costs or additional children) or new opportunities to invest the money in other ways could make you wish you had that extra $500+ a month to work with.
A key thing to remember is that most 30-year mortgages will allow you to make additional monthly payments to reduce the principal without penalty. You'll lose the advantage of that half a percent of percent of interest - an average of about $30 a month over 15 years in the example above - but you'll be able to keep your options open in the event you find you have other needs for your money. A lot can happen in 15 years (You can figure the difference accelerated payments would make on our What if I pay More? calculator).
Mortgage interest deduction a factor
The mortgage interest tax deduction also takes a big bite out of the relative savings between a 15- and 30-year mortgage. Since paying less interest means you have less to deduct, this can make the savings on a 15-year mortgage somewhat less attractive than they may seem at first glance.
Many financial advisers will also tell clients that they're better off putting that extra money each month into other investments. Since long-term investments in the stock market have historically exceeded 5.26 percent, anything returns you get above that rate are net gains compared to using the money to pay down your mortgage. Of course, recent history has shown the risks of this approach.
Another consideration is the long-term effects of inflation. Since prices, and incomes, tend to increase over time, your payments over the last 15 years of your mortgage will likely be lower in real terms than they are today - you'll be making them in inflated dollars.
Still a good option for some
All that said, there are still good reasons to seriously consider a 15-year mortgage. Some people like the discipline of being required to make the larger payment each month, instead of just having it be an option. For those who are looking at having children in college or plan on retiring in 15-20 years, it might make good sense to get their house payments out of the way by that time. Making larger payments also means you'll build up equity in the property more rapidly, meaning you'll be less exposed to negative equity in the event home values fall, and less likely to end up "underwater" on your mortgage.
As always, do the math. If you're seriously thinking about going the 15-year mortgage route, use our mortgage calculators to help crunch the numbers and see what makes the best sense for you. Also, talk to your financial adviser to see if there are any other advantages or disadvantages that may relate to your particular situation.