Pros and Cons of the 15-Year Fixed Mortgage

June 20, 2016

When most people think of a mortgage, they think of a 30-year fixed rate mortgage, which is the most common type of mortgage in the U.S. A fixed-rate mortgage is one with an interest rate that remains constant over the life of the loan.

The length of a fixed-rate mortgage doesn’t have to be 30 years. In fact, you can get a fixed rate mortgage for as few as five years. However, the most common alternative to a 30-year fixed rate mortgage is the 15-year fixed rate mortgage.

Pros of a 15-Year Fixed Mortgage

The 15-year fixed rate mortgage has some different pros and cons as compared to the 30-year fixed rate mortgage. The primary benefit is that you pay less overall because you are borrowing the money for a shorter amount of time. Also, because you are borrowing the money for a shorter period, the interest rate is lower. And of course, your mortgage will be paid off in half the time.

For example, suppose you want to take out a mortgage of $200,000. Further suppose that the interest rate on a 30-year mortgage is 3.5%, and the interest rate on a 15-year mortgage is 2.75%. With a 30-year mortgage, your monthly payment would be $898 and you would pay a total of $123,312 in interest over the course of 30 years. With a 15-year mortgage, your monthly payment would be $1,357 and you would pay a total of $44,304 in interest over the course of 15 years.

That works out to a difference of $79,008 in interest paid! In other words, taking out a 30-year mortgage instead of a 15-year mortgage will cost you nearly $80,000.

Cons of a 15-Year Fixed Mortgage

So why don’t we all choose a 15-year mortgage as a matter of course?

That’s because the 15-year fixed rate mortgage has some cons, primarily the higher monthly payment. A lot of people who can’t afford to pay $1,357 per month can afford to pay $898. Additionally, extending the the life of the loan increases the amount of debt a borrower can take on. Thus, a borrower who can afford to pay $1,357 can take out a $200,000 mortgage for 15 years at 2.75% interest, or a $300,000 mortgage for 30 years at 3.5% interest. Both mortgages would result in the same monthly payment, but the larger mortgage would allow the borrower to buy a more expensive house.

When it comes to deciding whether a 15-year mortgage is right for you, you should also consider whether you would be more financially stable paying off your mortgage quickly or paying off your mortgage more slowly but having a lower monthly payment. After all, most 30-year mortgages will allow you to pay down the principal of your mortgage at any time without penalty so you don’t have to take the full 30 years to pay off your mortgage.

But if you simply want to pay off your mortgage as quickly and cheaply as possible, a 15-year mortgage is definitely worth considering.

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