The 15-12 months Mortgage: Professionals and Cons
If you are considering buying a home with a mortgage loan, you may automatically gravitate towards a 30 year mortgage. These types of mortgage loans are the most common options for home buyers because of their low interest rates, lower payments, longer term, and other perks.
However, there are several other options besides a 30 year mortgage. What you may also want to consider is the less popular 15 year mortgage loan, which is usually known for significantly lower interest rates than the other types of mortgage loan. These types of loans are less popular than 30 year loans because you are expected to pay back your loan in 15 years, not 30 years – which can make them too expensive for some buyers. While your monthly payment may be higher on a 15 year loan, there are several advantages of a 15 year mortgage that can outweigh this one disadvantage.
Home buyers who can afford to repay their mortgage loan in half the time of a 30-year mortgage loan could save huge sums of money in interest over the long term with this option. In half the time, you’ll also be debt free – which is a huge benefit for most people. Before making any decisions about your mortgage or refinance loan, consider the pros and cons of a 15 year mortgage to see if it makes financial sense for you.
Advantages of a 15 Year Mortgage
A 15 year mortgage loan offers long term benefits, including significant savings on the cost of your loan and a faster way to get out of debt. Some of the benefits that you can expect from this type of loan are:
- Long-term savings. Your total mortgage costs are much lower on a 15 year mortgage loan than on a 30 year loan. The interest rates on 15-year loans are usually much lower, and you pay the interest for less time, so you can save significantly on the total interest on your loan. The result is more money in your pocket in the long run.
- Build equity faster. If you opt for a 15 year loan, more of your payment will go towards principal rather than interest, so you can build equity in your home much faster than usual. You can use this equity later in the form of inexpensive financing. This includes options for a home equity loan, line of credit, or payout refinancing.
- Refinancing is easier. As you build up your equity, you will have a lower credit-to-value ratio. A lower LTV makes refinancing easier and you can even cancel your private mortgage insurance faster than expected.
- Get out of debt sooner. A 15 year mortgage cuts your mortgage repayment period in half. If you buy your home when you are 30, you can be debt free by 45 if you opt for this type of loan. With a 30 year mortgage, you would make payments on your home until you were 60. Imagine the financial flexibility you could have in just 15 years.
- Forced savings. The higher monthly payment acts as a kind of compulsory savings when you have a 15 year mortgage. People who pay bills better than their savings can cushion could benefit from the shorter payment period.
[Read: Should You Pay Off Your Mortgage Early?]
Disadvantages of a 15 year mortgage
The potential advantages of a 15 year mortgage are attractive, but there are also some disadvantages to consider. These potential disadvantages include:
- Higher monthly payments. With your 15 year mortgage, you can expect much higher monthly payments. Eventually, you’ll cut your payout time in half, and while more of that monthly payment goes towards your principal than a longer loan, you still have to pay back a large loan. It is important to shop in a price range that will allow you to be happy with your monthly payment.
- Less affordable. A higher monthly payment can also affect other areas of your monthly budget. If you’re already feeling the pinch, a 15 year short term mortgage may not be worth the added difficulty.
- Less money for savings. Paying back a higher mortgage can leave you short of cash, which would mean putting less money into your savings or investment accounts. The money you save in interest on a 15 year loan could be less than what you could possibly make if you put that extra money in either a high yield savings account or an investment account.
- May not qualify for such a large mortgage. Part of your home loan qualification depends on how much debt you have each month compared to your income. You may not be eligible for such a large mortgage with this type of loan, although it depends on your other recurring debts.
- May affect eligibility for other types of loans. Your debt-to-income ratio also affects your eligibility for future loans. With a higher mortgage payment, you have less room for other types of financing that you may need later, such as B. a car loan, a student loan, or a personal loan.
[Read: Consider These 3 Things Before Getting a Home Equity Loan]
Is A 15 Year Mortgage Right For You?
A 15 year mortgage loan can be a powerful tool if you want to pay off your home loan debt faster and with less interest. But that doesn’t mean it’s right for everyone. Before opting for this type of loan, take a look at the price of homes that suit your needs and get an idea of the difference between two types of common loan terms: a 15 year old versus a 30 year fixed one Mortgage. This information will help you decide whether the shorter loan will comfortably fit your budget or whether you would need to look at cheaper homes to make it work.
You should also consider your job stability. If you’re in an industry with strong growth prospects and low sales, a 15 year mortgage can make sense. If your industry isn’t as stable or your income is unpredictable, you can appreciate the lower payments on a 30 year mortgage.
It’s also wise to take a look at what your savings and emergency fund will look like after you’ve paid your down payment. You never know what life is going to throw at you that could affect your earnings potential, like an injury or illness, even with a seemingly predictable job or income. If you are considering a 15 year mortgage, you should have a sizeable emergency fund in place to cover your monthly payment and other essential bills for at least several months.
If a 15 year mortgage isn’t the best idea right now, you have the option of refinancing into this shorter loan term later. After you have paid back part of your 30 year mortgage loan, you can refinance at the more favorable 15 year loan terms. You could even make your payments on your 30 year loan as if you had a 15 year mortgage to assess if that loan term is feasible, which will also help you repay your loan faster.
Too long, not read?
A 15 year mortgage definitely has its perks, especially if you want to get out of debt sooner rather than later. Just make sure that you can comfortably meet the commitment each month or your financial health will be at risk.
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