A 30-year mortgage is quite common among homebuyers because it spreads out the cost of a large loan over three decades, thereby making monthly payments more affordable.
But you aren’t required to go that route. Instead, you might consider a 15-year mortgage that will cut your repayment period in half. Toward that end, here are three reasons to obtain a 15-year mortgage rather than a 30-year mortgage.
1. You’ll save money on interest during the life of your loan
When you take out a mortgage, you repay your lender 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 that will reduce your total interest costs. Say you have a $200,000 mortgage with a 4 percent interest rate.
If you took out a 30-year mortgage, you’d pay $143,739 in interest during the life of your loan as opposed to $66,288 in interest with a 15-year mortgage. A 15-year loan also could net you a lower interest rate on your mortgage than a 30-year loan because your lender is getting the money back sooner and not taking on the same amount of risk.
2. You’ll build equity quickly
Getting a 15-year mortgage will 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. So, 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 quicker you pay off your mortgage, the sooner you’ll free up the money you spend on monthly payments, and that’s especially crucial if you’re buying a home later in life. It’s usually 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 into your limited funds.
