Most people who buy homes can’t pay for them outright, and instead finance them by getting a mortgage. The 30-year mortgage is fairly common among homebuyers, because it spreads out the cost of a very large loan over three decades, thereby making the monthly payments associated with it affordable.
But you don’t have to get a 30-year mortgage when you buy a home. You can also take out a 15-year mortgage and cut your repayment period in half. Here are three reasons to go that route.
1. You'll save lots of money on interest over the life of your loan
When you take out a mortgage, you pay your lender back in the form of interest on that home loan. With a 15-year mortgage, you're only borrowing that money for half as much time as you would be with a 30-year mortgage, so your total interest costs will be lower.
Imagine you're looking at a $200,000 mortgage with a 4% interest rate. If you were to take out a 30-year mortgage, you'd pay $143,739 in interest over the life of your loan. With a 15-year mortgage, you'd be looking at just $66,288 in interest. That's a huge amount of savings right there.
Furthermore, you’ll typically qualify for a lower interest rate on your mortgage with a 15-year loan than with a 30-year loan. The reason? Your lender is getting its money back sooner and therefore isn’t taking on the same amount of risk.
2. You'll build equity quickly
The term "equity" refers to how much of your home you’ve paid for and actually own. You can calculate your home equity by taking your home’s value and subtracting your outstanding mortgage balance. For example, if your home is worth $300,000, but you owe $240,000 on your mortgage, you have $60,000 in equity, or 20% equity in your home.
Another benefit of getting a 15-year mortgage is that it’ll help you build equity in your home faster than you would with a 30-year loan. When you pay off your mortgage in half the time, your monthly payments are larger, which means that more money goes toward your loan’s principal. As such, you pay down your mortgage balance sooner and increase your equity.
Why is that important? You’re allowed to borrow against your property in the form of a home equity loan, so the more equity you have, the more options you buy yourself.
3. You'll be mortgage-free sooner
The sooner you pay off your mortgage, the sooner you’ll free up the money you spend on your monthly payments. And that’s especially crucial if you’re buying a home a bit later in life. It’s generally smart to have your mortgage paid off by the time you reach retirement, because once you move over to a fixed income, you want as few expenses as possible eating up your limited funds.
If you buy a home in your 40s and you take out a 15-year mortgage, you can shake that debt before your golden years roll around. Take out a 30-year loan, and that’s unlikely to happen unless you manage to pay off your mortgage ahead of schedule.
Is a 15-year mortgage right for you?
There are plenty of good reasons to get a 15-year mortgage, but be aware that if you do, you’ll be stuck with higher monthly payments throughout the life of your loan. That could cause you undue financial stress, not to mention leave you with less money for other purposes during that time, such as investing or saving for a child’s college expenses.
However, if you can afford the higher monthly payment, a 15-year mortgage will save you money on interest, and help you shed your housing debt sooner. It pays to run some numbers and see what your budget allows for.
If you like the idea of a 15-year mortgage but are hesitant to get one, you can always take out a 30-year mortgage and make double the payments each month, thereby shaving your repayment period in half. The benefit of this strategy is that you're not locked into the higher monthly payments that come with a 15-year mortgage, so that if your income drops or other expenses climb, you can revert to your original payment without falling behind on your obligations to your lender. If you fail to keep up with your payments on a 15-year mortgage, however, you unfortunately risk foreclosure, and that’s the last thing you want.