If you buy a house, a mortgage lender typically will ask if you’d like a 15-year mortgage rather than the standard and conventional 30-year loan. If you’re considering a 15-year loan, here are some pros and cons to consider.
Pro: Your mortgage is paid off 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.
Pro: You’ll pay far less in interest. It isn’t just that you’ve shaved off 15 years’ worth of interest (although, yes, that’s a plus), but the rates typically are 0.75 percent to 1 percent lower for a 15-year mortgage than a 30-year mortgage.
Con: The monthly payments for a 15-year mortgage are higher than a 30-year. For example, 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. Your interest rate likely would be lower, but even if your interest rate dropped to 2.92 percent, you’d still pay $1,373 a month.
Con: There’s a negative effect on your annual taxes. You like deducting the mortgage interest on your taxes every year, right? Paying less interest each year means you won’t be able to take as big of a deduction when you file your income taxes. 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. If you’re 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.
