15-Year Mortgage: Weighing the Pros and Cons
While 90% of homebuyers opt for a 30-year fixed-rate mortgage — and there are plenty of good reasons to do so — a shorter path to homeownership is possible.
Thirty years is a good chunk of a human lifespan. It’s the difference between poodle skirts and acid wash jeans. The Ronettes and Destiny’s Child. The Johnson and Reagan administrations.
For the bulk of Americans, 30 years is also the length of time between taking out a mortgage and paying off the house, which means many families who settled into their homes at the end of the Cold War — with Cheers on TV and a wood-paneled minivan in the driveway — are just now paying off those houses.
And if Elon Musk’s vision for the future pans out, it’s conceivable that humans will colonize Mars before some of today’s homebuyers make the final payment on their 30-year mortgage.
While 90% of homebuyers opt for a 30-year fixed-rate mortgage — and there are plenty of good reasons to do so — a shorter path to homeownership is possible. Enter the 15-year mortgage or 15-year mortgage refinance. The shorter term generally means higher monthly payments but a lower interest rate than on a 30-year mortgage term.
Best of all, it will save you a decade and a half of mortgage payments — the equivalent of all 15 seasons of CSI: Crime Scene Investigation.
Does it pay to pay off your mortgage sooner by opting for a 15-year fixed-rate mortgage or mortgage refinance? Sometimes. It’s important to look at your overall financial picture and consult a mortgage calculator before jumping in.
First, make sure that your basic financial needs are met
Before you commit extra dollars to your mortgage, see that you can meet basic financial needs, like saving for retirement, maintaining an emergency fund, and paying off high-interest debt:
- Contribute to a workplace retirement plan such as a 401(k). Many employers will match your contributions, typically 50% of every dollar you put in up to 6% of your pay. If you’re not contributing enough to at least get the full company match, you’re leaving free money on the table — and missing out on an immediate 50% return.
- Take a look at your other debt. Chances are, if you have other debt, it’s accruing at a higher interest rate than what you’re paying on your home loan. That’s especially true for credit card debt, which can come with an interest rate that’s triple your mortgage rate.
- Build an emergency fund. You should have at least three months’ worth of living expenses set aside for a rainy day. That extra cash could help you make mortgage payments — and avoid foreclosure — if you lose your job or fall into financial trouble.
- Make sure you have adequate insurance coverage. Health insurance is an important financial safety net since medical issues are a factor in more than half of bankruptcies. And if you have children or a spouse who are financially dependent on you, see that you have life insurance.
Next, weigh the pros and cons of a 15-year mortgage
Following are some pros and cons to weigh when considering a 15-year mortgage or 15-year refinance:
Pro: Psychological boost. You might sleep a little better at night once your home mortgage — likely your biggest debt — is taken care of. While you can’t put a price tag on it, the psychological boost you’ll get from eliminating your house payment should be weighed against possible stresses of pooling more financial resources into the mortgage.
Con: Higher payments. Even with the interest rate savings, your payment will likely be quite a bit higher on a 15-year mortgage than a traditional 30-year mortgage, so you’ll have to budget for that. Additionally, it will be harder to cover those payments in the event of income loss or financial hardships, or if your income fluctuates from month to month.
Pro: Interest savings. Mortgage rates have been at record lows this year, and a 15-year loan term usually comes with an even lower interest rate. That’s because shorter loan terms are less risky for lenders. Along with the lower rate, you’re not stretching out the payments for as long as the 30-year mortgage, which could result in tens of thousands — or even hundreds of thousands — in interest savings over the life of the loan.
Con: Opportunity cost. Allocating extra funds toward your house payment each month means there is less money available for other investments, like retirement, your child’s college fund or savings. It also leaves less money to pay for home projects.
Pro: Forced Savings. If extra money in your pocket tends to disappear quickly, being locked into a mortgage payment is a good way to make sure that money is put to good use. While the monthly payment on the 15-year term is higher than its 30-year equivalent, the extra money is going directly to building equity in your home.
Con: You’ll qualify for a less expensive home. You might have to compromise size, condition or location in order to qualify for the monthly payment on a 15-year mortgage. Additionally, depending on the rate of inflation, it’s possible that the interest savings on the shorter loan term may not be as much as the appreciation gain you might have realized on a more expensive house.
Pro: Potential tax savings. Mortgage interest is generally tax-deductible, so that 3% or 4% rate is effectively lower if you get some of the interest back each year in the form of a tax deduction. Calculate your after-tax interest rate to get a more accurate picture of how much you are paying in interest on your home loan.
Finally, consider these factors before making the move to a 15-year mortgage
Age, income and risk tolerance are just some of the factors that should go into deciding the length of your mortgage term.
If you’re nearing retirement, it might be wise to think about paying off the mortgage sooner so you won’t have to make mortgage payments on a fixed income. Plus, trying to make mortgage payments in retirement might mean withdrawing more from tax-deferred accounts, which can make your tax situation worse.
If you’ve got plenty of time until retirement, ask yourself how likely you are to save or invest that extra money instead of paying down your principal amount. If you’ll be tempted fritter away the extra funds on frivolous splurges, then putting the money in your home’s equity — which will save you thousands in interest payments — might be your best bet.
Review your financial goals and decide what is most important to you and your family. For some people, the feeling of erasing debt years earlier than your mortgage requires offsets any potential benefits of investing the money elsewhere.
If you are an existing homeowner, one alternative to a 15-year refinance is to make extra payments on your existing mortgage. Check with your lender first to make sure there isn’t a prepayment penalty. While this option may not yield the same interest savings as refinancing to a shorter-term loan at a lower rate, you won’t be locked into a higher payment, giving you more flexibility.
Still have questions about whether a 15-year mortgage is the right choice for you? Our experienced Zions Bank mortgage loan officers are available to help answer questions or find the right Zions Bank home loan* for you.
Kallee Feuz is a Public Relations officer for Zions Bank in Utah.
*Loans subject to credit approval. Terms and conditions apply. See banker for details.