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Is a 15-Year Fixed-Rate Mortgage Right for Me?

Is a 15-Year Fixed-Rate Mortgage Right for Me?

The most common home loan, by far, is the 30-year fixed-rate mortgage. It spreads out the principal and interest in an amortized pattern over three decades, allowing for manageable payments. It’s a good solid loan structure beloved by lenders and borrowers alike. However, it is not the only fixed-rate choice out there. The 15-year fixed-rate mortgage has plenty of benefits to offer as well.

What is a 15-year fixed-rate loan?

The name says it all: it is a mortgage loan with a term of 15 years at an interest rate that remains the same the entire time. These types of loans are available in different forms. In addition to conventional 15-year fixed-rate loans, the FHA, VA, and USDA all offer them as well.

The Benefits

Interest Savings

Perhaps the best reason for choosing this shorter loan, you can save tens of thousands of dollars in interest charges. For example, if you take out a loan for $300,000 at an interest rate of 6% for 15 years, you’ll pay roughly $156,000 in interest by the time you finish. If you buy or refinance at the same price and rate but with a 30-year fixed-rate mortgage, your interest charges will more than double to $347,000. Going with the 15-year loan will save you more than $192,000 in that situation, money that you could invest or use for home renovations.

Quicker Equity

You build equity faster with a 15-year fixed simply because you are paying a greater amount toward the principal each month. This could be helpful when you are ready to sell as you’ll have a lot more equity to put towards your next home.

Full Ownership Sooner

with a 15-year loan you will also have full ownership of your property in half the time. This might be important to you if you are nearly retirement age and do not want to be paying a mortgage long after your income decreases.

The Drawbacks

Higher Payments

When you cut the time frame in half, you will have to pay a much larger amount each month. In the above scenario with a $300,000 loan at 6%, the principal and interest payment on a 15-year fixed-rate mortgage would be about $2,500 a month. With a 30-year loan, the payment would only be $1,800. That $700 monthly savings can make a big difference if you are a first-time home buyer or on a tight budget.

Less Liquidity

You’ll build equity faster, but your money will be tied up in your house. You’ll have less disposable cash for other financial goals and projects. Of course, you can take out a home equity loan or line of credit to use that money, but you’ll have to pay interest and closing costs just to access it.

Not Available for all Purchases

Lenders may not offer a 15-year loan depending on your purchase size, down payment, and assets. A 30-year fixed-rate may be easier to qualify for in that situation.

Qualifying for a 15-Year Fixed-Rate Mortgage

To qualify for a 15-year loan, lenders require a good credit score and low debt-to-income ratio.

Before choosing a 30-year mortgage, consider the benefits of a 15-year fixed-rate loan.

If you or anyone you know is in the market for a home loan, give us a call today.

These materials are not from HUD or FHA and were not approved by HUD or a government agency.

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