Should I push the envelope on a 15 year mortgage?

Kara  Johnson
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Kara Johnson
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Pushing the envelope for a higher home payment is forced savings. You can decide on a 30 year home loan and pay extra each month and realize the same results. But that is optional and the rate will most likely be higher.

  • It’s a big decision as a home is a large purchase and most likely the highest monthly payment you will have. A high percentage of 15 year mortgage borrowers are of the refinance variety.

The last several years with rates so low many have been able to afford a 15 yr. payment. Refinancing from a 30 yr. to a 15 yr. in many cases has kept the payment the same or lower because of the drop in interest rate.

Save for the future

Spreading out the mortgage payments over 30 years can make a home a lot more affordable. Cutting that time in half with a 15-year mortgage probably won’t be a possibility with your first home. But later in life, when you’re earning more money, have more equity and plan on staying in a house for years to come, refinancing into a 15-year mortgage can make sense.

FAQ: Deciding on a 15-year fixed-rate mortgage payment requires reliable income and enough money left after your monthly payment to cover expenses, savings and emergencies.

15 year home loan pros and cons

As anyone who has looked at a mortgage statement or closing papers on a house knows, the interest paid on a 30-year loan can be almost as much as the principal paid over the life of the loan. That’s one of the first reasons to consider getting a 15-year mortgage.

  • It can be difficult to take the long view when looking at a monthly mortgage bill that will be higher over 15 years instead of 30.

Paying a home loan off in half the time requires a larger payment, of course, that will save you tens of thousands of dollars on interest charges. Why? Not only is more principal paid earlier, but interest rates on 15-year mortgages (or a 10 yr.) are usually better than other types of mortgages.

The downside is of course is a higher payment. If you experience tough times the lower 30 yr. payment won’t be an option.

An example of a $175,000 mortgage at 30 vs.15 years:

Mortgage type: 30 year 15 year
Interest rate: 3.5%    3%
Monthly payment: $785 $1,208
Total interest: $107,898  $42,533

That’s almost a savings of $65,500 by going with a 15-year loan. Divide that savings over 15 years and it’s about $363 saved per month.

FAQ: Home equity buildup on a 15 year is a huge benefit when it comes to selling the home. Translation: More money for your next home purchase.

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Home equity rises

Repaying a mortgage faster not only saves you money in the long run, but you build equity in your home faster too. If home prices rise, equity could grow more.

  • This is good for many reasons, including making refinancing easier by lowering your debt-to-income ratio.

While it won’t improve your cash flow, it should make it easier to be approved for a home equity loan or home equity line of credit. A home equity loan can be used to help pay for college, for example, and repaid if you need the equity back.

FAQ: If you use the extra cash for monthly mortgage payments that means it’s not available for other investments such as home improvements or emergencies.

A bigger stash for retirement

Another big advantage of cutting a home loan timeline in half is that if you plan to retire in the next 10 to 20 years, having your home paid for when you retire won’t hurt your finances in retirement. Instead of a house payment, you can use that money for retirement expenses.

If you continue paying a 30-year mortgage in retirement, you may have to pull money out of your savings to make the payments.

FAQ: When you are “so called” aggressive with your budget and finances the pay-off can be lucrative.

Are you disciplined?

If you can afford it, a 15-year mortgage is a forced form of discipline of paying off your home early.

But if you’re unsure if you can make the higher monthly payments for 15 years, one option is going half way by keeping a 30-year fixed mortgage but paying it off in 15 years. It will give you flexibility in paying the higher amount when you can afford it, and cutting back to the normal, 30-year payment amount when you can’t.

The 30-year mortgage will have the higher rate of 3.5 percent in the example cited above but paying $1,208 per month instead of the regular $785 payment will pay off the mortgage in 15 years. Only $42,533 will be spent in total interest opposed to $107,898 in total interest paid with a 30-year mortgage.

You’ll need to be disciplined to make the $363 in extra payments each month, but can do that with automatic payments.

FAQ: Either way even if you don’t religiously pay extra every month on a 30 yr. mortgage to make is a 15 year term, you still reduce the term even if you only do it half the time.

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