The decision to buy a home is one of the most consequential choices you will ever make. And unless you are independently wealthy or a recent lottery winner, that home purchase will probably come with a mortgage attached.
That mortgage is a multi-year, and possibly multi-decade, commitment, one that you will not be able to walk away from without serious and long-lasting consequences. For that reason, many home buyers choose a 15-year mortgage over the standard 30-year loan.
Opting for a 15-year mortgage instead of a 30-year commitment has a number of potential benefits. Here are four reasons to finance your home purchase with a 15-year mortgage – and two reasons to reconsider.
#1 – You Will Own Your Home More Quickly
The biggest benefit of a 15-year mortgage is also the most obvious. When you opt for a 15-year mortgage instead of a 30-year loan, you will pay off your home in half the time.
Instead of spending the next 30 years paying off your home, you will own the roof over your head in just 15 years’ time. The chance to own your home free and clear is certainly tempting, and it is perhaps the most compelling reason to choose a 15-year mortgage.
#2 – You Will Build More Equity
When you start paying your mortgage, a frightening percentage of those payments go to interest instead of principal. That can make building equity a slow and painful process.
Choosing a 15-year mortgage over a 30-year loan allows you to build equity twice as fast. And while those early payments will still be largely interest, the balance will tip to principal much more quickly, so you can own more of your home.
#3 – You Could Get a Lower Interest Rate
The interest rate you get on your mortgage will impact everything from your monthly payment to the final cost of your home. If you want to keep your interest rate as low as possible, opting for a 15-year loan could be very effective.
The interest rate on 15-year mortgages is generally lower than the rate on a 30-year loan, sometimes significantly so. That lower interest rate means you won’t be paying as much interest as you repay your mortgage.
#4 – You Will Save Money
The purchase price of a home is often misleading, especially when you factor in a multi-decade mortgage. By the time you get done paying all that interest, the roof over your head could cost far more than the original asking price.
By opting for a 15-year mortgage, you could save a significant amount of money. Every dollar of interest you save is one more dollar you have to invest, so you can build wealth more quickly and own your home in half the time.
There are many potential benefits to choosing a 15-year mortgage, but this decision is not without its risks. If you are thinking about opting for a shorter mortgage term, you need to be prepared for the costs. Here are two reasons you might want to reconsider that 15-year mortgage offer.
#1 – Your Payment Will Probably Be Higher
Since you will be paying off your home in half the time, you can expect a higher monthly payment. And while the lower interest rate can help to mitigate the financial damage, it is extremely unlikely the payment will be the same as a 30-year loan.
Before you sign on to a 15-year mortgage, you need to make sure you can support that higher payment, not only now but years into the future. It is tempting to take the shorter term, but you need to weigh the future risks against the long-term benefits.
#2 – You Are Locking Up More of Your Money
Opting for a shorter mortgage means locking up more of your wealth in the roof over your head. The ability to build equity more quickly may be tempting, but there is a serious tradeoff to consider.
If you face a large unexpected expense, like a roof replacement or the repair of water damage, you may not have the cash flow you need to set things right. You may end up borrowing more to cover those essential home repairs, and that could negate the benefits of a shorter mortgage term.
Buying a home is a major decision, one you should not rush into. There are many things to consider, from the nature of the neighborhood and the quality of the schools to the asking price and the interest rate. But it is your choice of mortgage that could make all the difference, and choosing the right term is an essential part of the home buying process. Opting for a 15-year mortgage has a number of potential benefits, but it is important to weigh those advantages against the undeniable downsides.
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