A 15-year mortgage is the dream loan for home buyers who can afford the much higher monthly payments and want to cut their mortgage in half while saving thousands of dollars in interest. To make a 15-year mortgage work, however, you’ll need a reliable income and enough money left after your monthly payment to cover expenses, savings and emergencies. Here, NerdWallet offers the pros and cons of a 15-year, fixed-rate mortgage.
PROS
• A shorter path to full homeownership
Owning a home free and clear is a goal that burns bright for many people. What matters most to them is a feeling of safety from knowing that their home is fully paid off.
• Build equity faster
A 15-year mortgage, with its lower interest rate and higher payment amount, builds equity faster because you pay down the principal balance quicker.
• Save money
Lenders are exposed to fewer years of risk on a 15-year mortgage, so they charge a lower interest rate. A 15-year mortgage also is less expensive because you pay interest over half as many years as with a 30-year mortgage.
CONS
• You have a higher payment
Monthly payments for a 15-year mortgage run about 50 percent higher than on a 30-year home loan. You also have to pay property taxes, insurance and, if you put less than 20 percent down, mortgage insurance. This could make it difficult for borrowers to respond to emergencies and other needs. Even if numbers seem doable now, this is an iron-clad commitment. There’s no escape except selling, refinancing or foreclosure.
• More equity is locked up
Because you are building equity faster, more of your money is tied up in a pool of savings that you can access only by selling the house or borrowing with a HELOC or home equity loan.
• Opportunity cost
Using money for mortgage payments means it’s not available for other investments—a higher return on stock investments, for example, or capturing an employer’s matching contribution to a retirement account.
• Qualify for less home
The higher monthly payments for a 15-year mortgage mean you’ll qualify for a less expensive property than if you’d stretched the loan over 30 years and kept your payments low.
• You lose some tax advantages
A 15-year mortgage has two tax disadvantages: You lose the mortgage interest deduction sooner when you pay off the loan in half the usual time, and the lower rate on a 15-year loan reduces the amount of interest paid compared with a 30-year mortgage.
