A 15-year mortgage isn’t the most popular term because the monthly payments are higher than those of 30-year fixed loans. But if you can make the payments, you stand to save thousands in interest over the life of the loan.
How does a 15-year mortgage rate compare to a 30-year mortgage?
As you may have guessed, 15-year mortgages are paid off in 15 years — half the time as the typical 30-year mortgage. This product is attractive for a few reasons.
The most significant selling point is lower interest rates.
In most cases, 15-year mortgages have a fixed rate. Lenders are concerned with calculated risks, and the risk of someone defaulting on a loan over 30 years is far greater than 15. If you apply for a 15-year mortgage, expect to score a rate that’s up to one point lower than the standard interest rate. Since it’s a shorter term, you’ll also be paying less interest overall over the course of the loan.
But the trade-off for lower interest and a quicker payoff period is higher monthly payments. Let’s say you’re looking at a $200,000 15-year fixed-rate mortgage, with an interest rate of 4%. You’ll pay $1,479 each month and a total of $66,288 in interest over the life of the loan.
If you compare this with a 30-year fixed-rate mortgage at 4.5%, you might pay $1,013 per month – but $164,813 in interest over time. And this doesn’t consider the closing costs and ongoing expenses like HOA fees, utilities and maintenance fees, and mortgage insurance if you put less than 20% down.
For a $200,000 mortgage …
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A 15-year mortgage may suit those who want to pay less interest over the life of their loan and can afford the higher monthly payments.
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What are the benefits of a 15-year mortgage?
- Lower interest. You’ll score lower interest rates and pay less interest over the life of the loan.
- Shorter payoff period. Pay off your home twice as fast as you would with a 30-year mortgage.
- Build equity faster. Pay down the principal balance and increase your equity at a quicker pace.
- Stable payments. Opt for a fixed-rate mortgage and your monthly payment won’t fluctuate, even if the market does.
- Fewer fees with government-sponsored programs. For example, the FHA charges lower mortgage insurance premiums for 15-year borrowers.
What should I watch out for?
- Higher monthly payment. You’ll typically pay hundreds more per month than you would for a fixed rate loan with a longer term.
- Modest or limited options. Since the payments are higher, you may qualify for a less expensive property than if you’d stretched the loan out over 20, 25 or 30 years.
- Stricter eligibility requirements. You’ll need to prove you have a strong credit history and sufficient income to make your higher monthly payments.
- Fewer tax perks. Less interest means a lower mortgage interest deduction, and you’ll lose the deduction sooner.
Is a 15-year mortgage right for me?
With a 15-year mortgage, you need to be disciplined with your budget. If you can afford the monthly payments while still saving for the future, a 15-year mortgage may be the right fit for you.
This term could be attractive to borrowers who want to be debt-free by the time they retire. It could also be beneficial for those who want to tap into the equity in their home to cover large expenses such as renovations and college tuition.
On the other hand, if your income is unstable or you’re interested in investing more of your money, you may want to opt for a longer mortgage term.
ARMs vs. fixed-rate 15-year mortgages
A 15-year fixed-rate mortgage is the most typical option, and there are a few types. Depending on whether your loan meets the conforming loan limits, you could apply for a conventional or jumbo loan. If you’re a first-time homebuyer or have a low credit score, you could apply for an FHA loan.
If you or your spouse are active or retired military members, you may qualify for a VA loan. With a fixed-rate mortgage, the interest rate and monthly payments don’t change. They’re predictable and can be easier to factor into your budget.
These offer a teaser rate that’s fixed for the first three, five or seven years, and then resets annually for the rest of the loan period. This means your interest rate and monthly payment could increase every year based on market conditions.
To compensate for this uncertainty, most ARMs start with lower interest rates than fixed-rate mortgages. Typically, homebuyers opt for a 3/1, 5/1 or 7/1 ARM when they move a lot or are planning to refinance sooner rather than later.
Which banks offer a 15-year mortgage?
A handful of banks and credit unions offer 15-year mortgages, including:
A 15-year mortgage is ideal for those who want to slash their interest payments and pay off their loan faster. While borrowers benefit from lower interest rates, the trade-off is higher monthly payments.
Compare other mortgage terms and lenders in our guide to mortgages.
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