When deciding on the term length of a mortgage or refinancing loan, borrowers would be wise to consider all the angles. The benefits of obtaining a 15 year mortgage (versus a loan paid back over 30 years) can be more plentiful than merely shortening the repayment period.
Taking an Interest in Interest
Sure, a 15 year mortgage means higher payments in the short-term. But consider the bigger--or, more accurately, longer--picture. Fixed mortgage rates are lower on 15-year mortgage loans than they are for comparable 30-year fixed rate home loans (between .5 and one percent). So while monthly payments are higher for a 15-year mortgage, the loan is paid off faster at a lower interest rate.
Furthermore, a shorter loan term with higher monthly payments causes more of each payment to be applied to the principal balance. and less to paying interest. This reduces the mortgage balance faster and can save homeowners thousands in interest payments. For example, total interest paid for a $200,000 15-year loan at 3.36 percent equals $54,890, while for a 30-year loan at 4.2 it's $152,092.
Fifteen and Fixed
Borrowers might be tempted to jockey around for the most favorable terms through an adjustable-rate mortgage, where rates vary over the course of the loan. Hybrid mortgages, which offer low introductory fixed rates and then convert to adjustable-rate loans, may also look appealing. Yet betting that rates will not rise and boost payments substantially can be risky. Lenders overwhelmingly offer 15-year home loans at a fixed rate. Therefore, a 15-year mortgage equates to steady rates and consistent payments on principal and interest throughout the life of the loan, making it easier to budget your money and plan ahead. It should be noted that mortgage payments that include extra amounts covering taxes and insurance may vary, since amounts due for these items can change over time.
Build Equity Faster
Another benefit of a 15-year mortgage concerns the matter of equity. Home equity is the difference between a home's value and any money (via a mortgage or mortgages) owed against it. In short, a 15-year home loan builds home equity faster than a 30-year home loan because borrowers pay more toward the principal.
Here's an example. The principal and interest (P & I) payment for a 30-year mortgage of $300,000 at four percent is $1432.25. With the first payment, the principal paid is $432.25 while the interest paid makes up the remaining $1,000. Given the same loan amount, the monthly mortgage payment for a 15-year loan at 3.375 percent is $2,126.28. The principal paid with the first mortgage payment is $1,282.53 and the interest paid is $843.75.
One more thought on the importance of equity -- building home equity not only gives homeowners a financial cushion; it can also serve as a source of cash. The resulting financial flexibility can pay for travel, resolve consumer debt or fund home improvements.
Make the Most of It
Those not sure if a 15-year mortgage is the way to go should be guided by their financial situation and comfort level. Borrowers who can afford to pay more each month, and are willing to do so can reap the benefits that come with a shorter loan period.
Mortgage shoppers can find their best deals on 15-year home loans by comparing mortgage quotes from competing lenders.