When it comes to budgets and how much someone can save, housing is one of the biggest expenses to manage. No wonder people have so many questions about choosing the right mortgage! Most people find themselves choosing between a 30-year or 15-year mortgage. To help you decide, it's important to understand the 15-year mortgage pros and cons.
What is a 15-Year Mortgage vs. 30?
Before we take a closer look at a 15-year mortgage, it's important to understand what a mortgage is exactly. Of course, everyone knows that mortgages are bills. But there's more to it than that.
Typically, when people refer to a 15-year or 30-year mortgage, they are talking about a fixed-rate mortgage. With a fixed-rate mortgage, the interest rate never changes for the whole life of the loan. That means that your lender charges you the same amount of interest in year 1 as they do in year 15 or even year 30. That makes it simple to know how much you need to pay each month.
Most people opt for fixed-rate mortgages, but where they disagree is the length of the loan. That's a fancy way to say how long you want to pay off your house.
In some instances, people choose a 30-year mortgage. That means they are going to spend the next three decades paying off their house. Other people cut their debt freedom journey in half by selecting a 15-year mortgage.
While a 15-year mortgage definitely has its advantages, it's important to really understand all that comes with a 15-year mortgage before choosing one. That's where we can help!
This mortgage guide will walk you through the ins and outs of a 15-year mortgage, helping you decide if this choice is right for you.
15 Year Mortgage Pros and Cons
Are you looking to fast-track your debt freedom journey? Do you anticipate needing more flexibility in your budget? Your mortgage can have a ripple effect on your financial situation for years or even decades. That's why it's so important to understand the 15-year mortgage pros and cons.
After looking at these benefits and drawbacks, you should have a better sense of which type of mortgage is right for you!
Advantages of a 15-Year Mortgage
There are some serious perks to choosing a shorter mortgage term. Here are three main reasons to consider a 15-year mortgage.
Grow Your Home Equity Faster
Home equity isn’t just something to put on a spreadsheet (though that feels pretty great!). Equity in a house can be used for a home equity loan or for a HELOC–a home equity line of credit. Either way, you can use equity to cover renovations. Other people use it to pay for college or to get a handle on other high-interest debt.
Having more equity in your home can also work in your favor if you ever find yourself moving primary residences or getting into real estate rentals.
Even if you don’t use the equity in your house, reaching debt freedom faster can be incredibly rewarding.
Own Your Home Sooner
I always had a sense that I wanted to own my home sooner. But I truly couldn’t imagine how fantastic life after a mortgage would be. If you’re ready for life after a paid-off mortgage, then a 15-year mortgage might be the right move for you.
By definition, you own your home sooner with a 15-year mortgage–twice as fast in fact. That means that you have more time to invest, donate, or travel. Basically, becoming mortgage-free faster means that you have more control over your money and your time.
Pay Less Over Time
The faster you pay off your home, the less money you pay in interest. Opting for a 30-year mortgage means that you are planning to take twice as long to pay off your loan.
It also means that you are agreeing to pay a lot more in interest. As an example, let me show you what our mortgage situation looked like.
We went with a 15-year mortgage at a 3% interest rate (with a $195,000 original principal). If we let the loan play out for the entire 15 years, we would have paid $47,394.35 in interest.
Our other option was a 30-year mortgage at a 4% interest rate. If we let that loan play out for the entire 30 years, we would have paid $140,145.48 in interest!
Almost three times as much interest!
If you think a 15-year mortgage is right for you, run your numbers with Credible or a local lender. Taking a look at numbers for your specific situation can really make the pros of a 15-year mortgage pop!
Disadvantages of a 15-Year Mortgage
There are plenty of pros to a 15-year mortgage. But before you sign on the dotted line, you should be aware of the drawbacks as well.
Limited House Hunt
In any housing market, a buyer wants to keep their options open. However, some people might find that a 15-year mortgage actually limits their options.
Since the monthly payments are higher, you might find yourself qualifying for a smaller loan amount. That could price you out of certain neighborhoods or keep you from getting that extra bedroom your family really wants. Of course, other people would argue that this actually ensures that you aren't buying more “house” than you need.
Larger Payments Each Month
When you compare it to a 30-year mortgage, a 15-year mortgage is going to require you to make a larger payment each month.
For example, our 15-year mortgage payment (without taxes and insurance at a 3% interest rate) was around $1,350 on a $195,000 mortgage. If we would have gone with a 30-year mortgage instead (at a 4% interest rate), our payment would have been around $930.
These larger payments mean that more of your budget is consumed by housing costs each month. That’s especially true when you factor in property taxes, homeowners insurance, and possibly even private mortgage insurance. When so much of your budget is consumed by housing costs, you might start to feel “house poor”. And based on my first housing experience, that is definitely not something you want!
Less Budget Wiggle Room
What’s the biggest downside to finding yourself in a situation that makes you “house poor”? With less wiggle room in your budget, you might find yourself having a harder time covering other expenses, saving for other goals, or paying off other debt.
You don’t want to buy your dream home only to realize you can’t afford to furnish it or even order pizza every once in a while. But for some people, a 15-year mortgage can force you into that situation, especially in a hot housing market.
One helpful way to combat this is to remind yourself of other housing expenses you want to account for. Some of these expenses include:
- Home repairs and maintenance
- Upgrades and renovations
- Furniture and décor
- Landscaping and lawn care
- Property taxes
- Homeowner's insurance
- Private mortgage insurance (PMI) – if applicable
Knowing how these categories fit in your budget should help you see how a 15-year mortgage payment compared to a 30-year payment will fit in your plans.
Frequently Asked Questions
You know some of the major pros and cons of a 15-year mortgage, but you probably still have questions. After all, your mortgage payments can have a big impact on your budget.
Let’s explore other commonly asked questions when it comes to 15-year versus 30-year mortgages.
Is it better to get a 30-year mortgage and pay it off in 15 years?
Sometimes! In some situations, it is better to get a 30-year mortgage and pay it off in 15 years–or whatever timeline works for you.
There’s a big advantage to this strategy, namely flexibility. To see how this strategy affords homeowners more flexibility, let’s go over a few reminders:
- Payments on a 30-year mortgage are smaller than payments on a 15-year mortgage.
- You pay more interest on a 30-year mortgage–if your payments stretch out for the full life of the loan.
- Most loans allow you to pay extra toward the principal each month, but you always want to read the fine print for your situation.
Now let’s take a look at this flexibility in action. Let’s assume that your regular mortgage payments are $1,000 each month. Maybe your side hustle is finally starting to take off. Now you are able to pay an extra $1,000 a month toward your mortgage principal. Fantastic news! You are on track to cut decades off of your 30-year mortgage!
After making these double mortgage payments for several years, your family situation changes. Maybe you welcome a new addition or maybe a parent returns to work and a child starts preschool. There are many reasons why a family might need to rework their budget from time to time. If you have been making double mortgage payments, you can simply scale back to the original $1,000 payment amount without having to juggle any refinancing.
Thanks to that flexibility, you can readjust your mortgage payment amount as often as you’d like as long as you are covering the amount written into your 30-year loan.
How can I pay a 15-year mortgage off early?
Yes, it is possible to pay off a 15-year mortgage early! We did it in less than 5! There are two main ways you can pay off your mortgage early: increase your income or decrease your expenses.
Some people might choose to increase their income by starting a successful side hustle. Other people land promotions at work or change careers to grow their earning potential. No matter how you increase your income, you can use this extra money to pay off your mortgage early.
Of course, you might also find yourself in a windfall situation. Perhaps you end up with an unexpected tax refund, a bonus, or even an inheritance. You can also pay off a 15-year mortgage early by making a one-time lump sum payment.
If you are paying extra toward your mortgage, you might want to consider doing a mortgage recast. This is usually a quick and inexpensive way to reduce your monthly payment amounts without refinancing your loan.
You also have the ability to refinance your mortgage. This choice is especially appealing if mortgage interest rates drop. Check out when it might be the right time to recast or refinance to learn more.
What makes a 30-year mortgage better than a 15-year mortgage?
For some people, a 30-year mortgage is better than a 15-year mortgage. The payments are typically considerably smaller each month, freeing up room in your budget for other expenses, savings, debt payoff, or investing.
You also have the ability to make larger payments whenever possible. Some people use this strategy to informally turn their 30-year mortgage into a 15-year one. The added benefit is that you can reduce your payment amounts back to the original amount in the event that other expenses crop up.
Of course, the drawback to a 30-year mortgage is that you will end up paying considerably more in interest if you actually keep paying on your mortgage for 30 years. As with all things in personal finance, it’s important to consider your personal situation when deciding which mortgage is right for you.
Final Thoughts on 15 Year Mortgage Pros and Cons
Are you ready to weigh your options and see which mortgage is best for you? Reach out to a local lender or give Credible a try. They can help you look at specific numbers tailored to your budget and the housing market in your area. Then you can see the pros and cons of a 15-year mortgage in action!
Where are you on your mortgage journey? Do you have any experience with a 15-year mortgage? Do any of the pros or cons stand out to you?
Please let us know in the comments.