The majority of Americans who apply for mortgages choose the 30-year fixed-rate option. It’s the path that’s been taken by borrowers for generations and, over the years, it’s pretty much become the industry standard.

However, the less popular 15-year mortgage does have some advantages for homeowners who can swing it. Let’s take a closer look at this option and find out when it might be the right choice for you.

What is a 15-Year Mortgage?

Well, the name pretty much explains it all. A 15-year mortgage is a home loan that will be paid off in 15 years, assuming you make all of your scheduled payments on time. Typically, these loans have a fixed rate, which means the interest rate and payments remain the same for the life of the loan.

The thought of having your loan paid off in 15 years probably sounds like a wonderful option, and it might be. But, like anything, there are pros and cons to this type of loan.

 

What are the Benefits?

Sean Cotter, branch manager and assistant vice president with Eaton Federal Savings Bank, says the biggest benefits of a 15-year mortgage are less interest paid — as compared to a loan with a longer term — and simply having your home paid off sooner.

“Paying your mortgage off in just 15 years can provide more financial freedom and peace of mind,” he said. “Once this major monthly payment is out of the way, you’ll have more flexibility to accomplish other goals, like helping your children with their college education, saving more for retirement, or simply doing more things you enjoy, like traveling.”

A 15-year mortgage also allows you to build equity faster and pay down your principal balance more quickly. In the first 5 years, you’ll have actually paid down a good chunk of the principal, as opposed to a 30-year mortgage in which you’re really only paying interest in those first few years.

The shorter term loan is also a lot cheaper in the long run because you’ll pay less in interest. Since lenders are exposed to fewer years of risk on a 15-year mortgage, they may charge a slightly lower interest rate. Cotter says while the difference in rate percentages is minimal, the overall interest savings can be substantial.

“Your monthly payment will be more, but you’ll pay interest over half as many years as with a 30-year, and that makes a difference,” he said.

For instance, let’s say you have a $150,000 loan at 4.7 percent interest over 30 years. At the end you will have paid $130,389 in interest. If you take that same $150,000 over 15 years with a slightly lower rate of 4.15 percent, you’ll pay $51,751 in interest, saving yourself $78,638.

 

What are the Drawbacks?

Of course, the biggest downside to a 15-year mortgage is pretty obvious...it will cost you more each month.

If we look back at our previous example, the 15-year mortgage will cost $1,121 each month, while the 30-year would bring the payment down to $779, a difference of $342 a month. Depending on your financial situation, the ability to make lower, more affordable monthly payments may outweigh the benefits of the shorter term mortgage.

Even if the numbers seem doable now, a lot can happen in 15-30 years. Cotter says that unknown is why a lot of borrowers prefer the security of the longer term loan.

“Assuming there are no prepayment penalties, some borrowers will go with a 30-year mortgage and then make additional principal payments,” he said. “This gives them the flexibility of making larger payments when they have extra cash, but falling back on that 30-year payment when money is tight.” 

Sticking with a 30-year mortgage also means you keep more cash in your pocket, which gives you the opportunity to pay off debt and grow your personal savings. And, since payments on a 30-year loan are less than on a 15-year, your debt-to-income ratio will be lower. This means you will likely qualify for a larger loan, which may open up more options during the home search.

 

Which one is right for me?

Deciding between these two loan types is a major decision that will have long-lasting financial effects. Before choosing an option, review your current financial situation, put together a budget, and think about your long-term financial goals.

For instance, someone who plans to retire in the next 15 years may want to pay off their mortgage ASAP, so a shorter term loan may be a good option. But, for first-time homebuyers with little disposable income, a 30-year term may be a better fit.

The best way to settle the 15- vs. 30-year mortgage debate is to sit down face-to-face with a local, professional mortgage lender.

“Together we can go over your finances and goals, and put together illustrations of both options so you have all the information laid out,” said Cotter. “When you’re well-informed it can take the fear out of this process and allow you to be truly comfortable with your decision.”

Visit the Greater Lansing Association of REALTORS^® website at www.lansing-realestate.com for a listing of experienced local agents and lenders who are happy to sit down for a consultation and answer all your questions.