Are you wondering whether to choose a 15-year mortgage when you buy or refi right now? On average, roughly 90% of home buyers choose a 30-year term, but lately we’re hearing a lot of buzz about shorter term loans.
Low mortgage interest rates are leading many experts to suggest that the shorter term could be a smart move for more buyers and refinancers. And it might be—but first, you need to consider the pros and cons very carefully.
When you’re facing a decision that will have such a big financial impact, it pays to do your due diligence; look at both the short and long-term. This choice could cause you to pay hundreds of dollars extra a month—but also pay tens or hundreds of thousands LESS over the life of a loan!
Why choose a 15-year mortgage (or not). A look at interest rates
First, the basics: when you borrow a sum of money, whether for a house, car or other loan, you typically commit to paying the loan back over a certain period of time. The two most popular lengths for home loans is 15-year or 30-year.
If you choose the shorter period, you’ll be finished sooner: 180 months vs 360. Of course, you also have to pay the whole loan off in that shorter time, so even though you’ll likely pay a lower rate, your monthly payments tend to be quite a bit higher.
- Are you confident in your ability to keep up with the higher payments, while still affording the rest of your needs and wants, for the next 15 years?
- Will you also be able to reserve money for emergency funds, insurance, kids’ college and retirement savings?
How much of a savings will you achieve?
A good rule of thumb when deciding if the rate difference will be worth it is half a point. So, for instance, if 30-year mortgages are at 3% or higher, and you can get 2.5% or lower for a 15-year mortgage, that potential positive payoff of the shorter term is one added vote in favor of the decision to choose a 15-year mortgage when you buy or refi.
What’s your motivation?
Do you want to enjoy 15, 20 or more years in your home without a mortgage payment to worry about? That may be particularly important if you intend to retire in 10, 15 or 20 years, or if you’re highly motivated to achieve financial freedom. Being able to coast later is a big reason many choose to buckle down initially.
If you’re a person who likes to take the long-term view, the savings from choosing a 15-year mortgage when you buy or refi can be enormous—$100,000 over the life of even a very modest loan is not unreasonable. Plus, you’ll build more equity (or the amount of value you’re able to keep if you sell), because you’re paying more each month.
Are you midway through your 30-year term and considering refinancing?
If you’re just at year 15, and fairly certain you’ll be staying in one place, that may be a good time to choose a 15-year mortgage. Depending on your existing interest rate, you could save a bundle by getting a new lower one over a shorter term.
Are you disciplined about your finances?
A 15-year mortgage enforces financial discipline. On the flip side, many advisors note that a 30-year mortgage allows you to put any money not earmarked for the mortgage into other investments. And many investments can earn more than whatever you might save through a lower mortgage interest rate.
For those who can be disciplined, it’s all about flexibility. If you can commit to putting the extra money towards paying your mortgage sooner, great; you’ll save big time. If you decide to contribute to higher-interest-earning, yet also liquid, accounts, you’ll be able to build a safety net. And a safety net is something more people appreciate these days, as the pandemic has forced us to reconsider the value of back up plans.
As you can see, there are some serious pros and cons here. That’s why we always recommend you talk to a financial advisor as well as a mortgage lender before deciding whether to choose a 15-year mortgage when you buy or refi.