Mortgage companies frequently pitch their 15-year mortgage ads online. And if you aren't running into ads, if you buy a house, you'll certainly be asked if you'd like a 15-year mortgage instead of the standard and conventional 30-year loan. All of which could make anyone wonder -- is a 15-year mortgage a good idea?
It can be. It may also wind up being a decision that you rue from the moment you make your first payment to the day you and your belongings wind up on the street. Everyone's financial situation is different. But if you're mulling a 15-year mortgage, you've got plenty of pros and cons to consider.
Pro: Your mortgage is paid off far sooner, freeing up your cash. That's an obvious pro, of course, and it's why many people do it. You might easily save tens of thousands, or even hundreds of thousands of dollars, depending on how expensive the home, thanks to having a shorter time to pay off your loan.
"Over the life of the loan, you save about two-and-a-half times more in total interest with a 15-year mortgage versus a 30-year mortgage," says Matt Culp, owner of Bainbridge Lending Group, on Bainbridge Island, Washington.
Pro: You'll pay far less in interest. It isn't just that you've shaved off 15 years' worth of interest (though, yes, that's a plus), but the rates are usually lower for a 15-year mortgage than a 30-year mortgage.
Typically, interest rates are 0.75 to 1 percent lower, says Casey Fleming, a San Francisco-based mortgage advisor and author of the book, "The Loan Guide: How to Get the Best Possible Mortgage."
"The lower the interest rate, the faster the principal payoff even using the same time frame. So a 15-year mortgage yields a double bonus, so to speak," Fleming says.
But if you're thinking, "I am going to get a 15-year mortgage and become rich with savings," well, not so fast. There are some drawbacks.
Con: The monthly payments for a 15-year mortgage are higher than a 30-year. For instance, if you took out a $200,000 mortgage at a 3.92 percent interest rate for 30 years, your monthly payments would be $946 (without factoring in taxes and other costs). If you took the same terms but paid off the mortgage in 15 years, you'd pay $1,471 a month. Now, granted, your interest rate would likely be lower, but even if your interest rate dropped to 2.92 percent, you'd still pay $1,373 a month.
Culp, who is a fan of 15-year mortgages and has one himself, also points out that the more expensive the home, the tougher it can be to handle the payments.
"On a given loan amount, the 15-year payment -- principal and interest -- is about 1.5 times the 30-year fixed payment," Culp says. "Therefore, if the 30-year payment was $1,000 a month, it would be about $1,500 on the 15-year loan."
He says that some owners may not feel that a $500 difference is that big of a reach, but the math really gets serious as the price of the home climbs. Culp offers up the example of a $3,000 monthly mortgage for a 30-year loan. The monthly payment would jump to $4,500 a month with a 15-year mortgage.
So it's hard to argue with Fleming when he says: "Fifteen-year mortgages are not a good idea for folks with thin savings, or who carry credit card balances, or who have only one job in the family or who are on commission."
"You know how it works in life -- one year you are making really good money, and maybe you can pay the high payment on a 15-year mortgage no problem, but then all of the sudden, things change and you are making less. You don't want to get stuck," says Liliana Giraldo, a senior loan officer at Quontic Bank, headquartered in New York City.
For that reason, Giraldo says she would advise most people to stay far away from the 15-year mortgage and go with the conventional 30-year one.
Corey VanDenBerg, a lending officer at The Farmers State Bank in Brookston, Indiana, has similar thoughts. He says he has had several customers who have not only taken on a 15-year mortgage, but lived to tell the tale and felt that it was far superior to a 30-year mortgage. But (you knew a "but" was coming) VanDenBerg has also heard of foreclosures blamed on the 15-year mortgage having too high of a payment. He also has had customers come back and refinance to a 30-year mortgage to lower their payments.
Con: There's a negative affect on your annual taxes. You like deducting the mortgage interest on your taxes every year, right?
"Because you pay less interest each year, that means you won't be able to take as big of a tax deduction when you file your income taxes," Culp says.
This is probably not enough of a negative to not do a 15-year mortgage if you're otherwise excited, but it's still something to consider.
Con: You won't free up that cash for 15 years. Sure, in the long run, you save a lot of money, and you'll have no mortgage payment sooner and will have extra money to spend on whatever you want. But because of those high payments, you might have a tight cash flow for 15 years. For a decade and a half, you might find yourself struggling to put away money toward your retirement, your kids' college fund or a rainy day fund.
Giraldo points out that if you're really excited about the idea of having your mortgage paid off in 15 years, but are daunted by the idea of those higher monthly payments, you could take on a conventional 30-year mortgage -- but make higher payments or extra payments that would still get your house paid off in 15 years.
Matt Hackett, operations manager of Equity Now, a direct mortgage lender in New York City, has similar advice -- and solid logic.
As Hackett puts it, "If one opts for a 30-year mortgage, they have the option to make higher monthly payments. ... Someone who opts for the 15-year doesn't have the option to make a lower payment."
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