A 15-year fixed-rate mortgage saves you money in the long-term
Depending on your budget, a 15-year fixed-rate mortgage can be one of the best home loans available to homebuyers. You get all the advantages of a fully amortizing, fixed-rate loan, including the assurance that your monthly payment won’t change over the course of the 15-year term. This loan type also gives homebuyers the added benefit of paying significantly less interest over the course of the loan than you would with a longer term, fixed-rate loan like the more common 30-year mortgage.
Having a fixed rate mortgage is a big advantage when you want to plan for your future. By locking in your interest rate at the time you get a 15-year fixed mortgage, you have a predictable, unchanging monthly payment that allows you to manage your household budget without juggling rate changes. There will be minor adjustments to your monthly payment over the lifetime of the loan as your property taxes, insurance premiums, homeowner association or condo fees change, but overall, a 15-year mortgage gives you a consistent, predictable payment for the next 15 years that lets you set your household budget accordingly. Because this is a fully amortizing loan, just as a 30-year fixed-rate mortgage is, your monthly payment covers both the principal and the interest. So long as you don’t refinance or make other changes to the terms of your loan, your mortgage will be paid in full at the end of the 15-year period. This loan type also qualifies you for an annual tax deduction from the interest you pay on your mortgage. In combination, this means you’ll know exactly how much you have to budget for other expenses, savings and investments, and you’ll be saving money on your taxes.
Additionally, because many 15-year fixed mortgages have lower interest rates than longer term home loans, and because you’ll be paying interest for a shorter time, you’ll pay significantly less in long-term interest costs when compared to a 30-year mortgage. Your loan payments apply more to principal early on, and you make half as many payments to pay off your loan, which can save you thousands of dollars. As a comparison, at today’s interest rates, approximately two-thirds of your monthly payment on a 15-year mortgage is applied to the principal, and one-third goes to interest. In the first 15 years of a 30-year loan, it’s the reverse; you make lower monthly payments but approximately two-thirds of your payment goes to interest. Plus, if in the future your budget changes and you determine that those higher payments aren’t working for you anymore, you can refinance up to 95 percent of your loan amount.
What are the disadvantages of a 15-year fixed-rate mortgage?
This type of loan has two disadvantages when compared to longer term mortgages. The first is obvious: even though interest rates are lower on 15-year loans, the monthly payments are significantly higher because it is a shorter term loan. This fact often makes a 30-year fixed-rate mortgage more appealing to the average homebuyer.
The less obvious problem is that the higher monthly payment doesn’t change even when life throws curve balls your direction. Because you locked this payment in when you got your mortgage, you don’t have the option to change it, and you lose the flexibility you might need if your income changes or you have unexpected expenses such as a medical emergency. Whether those changes are temporary or permanent, your minimum payment remains fixed. For this reason, some homebuyers who can afford higher payments find that a safer solution is to get a 30-year loan and pay it off in 15 years by adding extra money to the monthly payment. In this way, you are paying more toward principal from the get go, just as you would with a 15-year mortgage, but you retain the flexibility to not pay that extra money on any given month in which you find yourself with unexpected expenses.
Talk to a qualified loan officer about which financing option is right for you
Our mortgage officers are here to help you understand all of your options and to assist you in making the best choice. They’ll keep your budget in mind as you look at the cost of purchasing a home, including loan payments, insurance, taxes, and other factors.
Learn more about the terms of our 15-year fixed rate mortgage options.
