A 15-year fixed-rate mortgage may be a better alternative for many borrowers than a conventional 30-year mortgage.
But what is a 15-year fixed mortgage, how does it operate, and how can you determine if it suits your financial circumstances? Let’s investigate together.
How a Fixed-Rate 15-Year Mortgage Operates
A 15-year mortgage is defined by its term length and is one of the various fixed-rate mortgages available for application. The interest rate on these loans is fixed at the moment of closing, meaning that it will not change during the life of the loan. You will have a fixed monthly mortgage payment, making it simpler to create a budget. These home loans can be utilized to purchase a property or refinance an existing mortgage.
A 15-year fixed loan entails 15 years of monthly payments. After 15 years, the loan will be fully repaid.
A 15-year fixed-rate mortgage is less expensive than other mortgage alternatives throughout the life of the loan. Because interest rates are usually lower and loans are repaid more quickly, you will pay less in total interest. However, 15-year mortgages have larger monthly payments than typical loans with longer payback horizons, such as 30-year fixed-rate loans. Consequently, a 15-year fixed-rate mortgage may strain your family’s finances.
Mortgages With 15-Year Terms
If you are interested in obtaining a 15-year mortgage, you must determine the sort of loan you wish to pursue. Here are some of the most prevalent 15-year mortgage house loan kinds.
FHA loans primarily aid low- and middle-income households and first-time homebuyers. They provide a relatively low minimum credit score requirement (500 for Rocket Mortgage®) and a minimal down payment of 3.5%. However, it is also important to note that FHA loans may have minimal income-qualifying limits and greater fees than other lending choices.
VA loans are intended for qualified veterans, active-duty service members, and surviving spouses. They are designed, like FHA loans, to make homeownership more affordable to certain homebuyers. VA loans need neither a minimum down payment nor a minimum credit score, determined by the individual lender.
USDA loans, made accessible by the U.S. Department of Agriculture (USDA), are mortgage loans provided to rural borrowers. Typically, these loans are targeted at low-income homebuyers with less-than-perfect credit. USDA loans often provide more advantageous cost structures and allow borrowers to purchase properties with no down payment. Rocket Mortgage does not offer USDA mortgages.
Borrowers may also choose 15-year conventional loans, which typically need a lesser down payment than FHA loans but have stricter credit score requirements. You’ll generally need a credit score of at least 620 and a down payment of at least 3% of the home’s worth to qualify.
Advantages of a 15-Year Mortgage
A range of benefits makes the 15-year fixed-rate mortgage an attractive option for some homebuyer groups. If you want to develop equity, pay off your mortgage in a shorter amount of time, and pay less interest, a 15-year mortgage may be the best option. Let’s examine the advantages of the 15-year fixed mortgage in further detail.
Build Home Equity Faster
Paying down your mortgage in 15 years will help you create equity in your house more quickly than a 30-year mortgage would. This equity can subsequently be utilized to get a loan or line of credit if you require more money for renovations, upgrades, or other enhancements.
Pay Less Overall Interest
The shorter payback period will result in lower interest payments throughout the loan, saving you thousands of dollars. Consider a $200,000 loan with a 3.0% interest rate. This results in a total amount paid of $48,609 throughout the loan term. Paying an interest rate of 3.65% on a $200,000 loan over 30 years results in an interest payment of $129,371. That’s an additional $80,762 in interest costs that you might have otherwise spent on something else. Are you interested in calculating possible financial savings? Use a mortgage calculator.
Own Your Home Free and Clear Sooner
If you want to pay off what is likely your greatest loan and buy your house outright in half the time allowed by a 30-year mortgage, a 15-year mortgage may be the best choice.
Disadvantages of a 15-Year Mortgage
Although 15-year mortgages provide several advantages, there are better options for some borrowers. Consider the downsides of the 15-year fixed-rate mortgage.
Increased Monthly Payments
For most borrowers seeking to apply for or refinance into a 15-year mortgage, the highest downside is the mortgage’s higher monthly payments. Although these mortgages feature lower interest rates, you’ll have to budget for higher monthly payments because you’re essentially paying off your home in half the time of a 30-year loan. How much more of a possible financial burden are we discussing here? With a $200,000 loan and a 3% interest rate, the monthly payment for a 30-year mortgage is $675, but the monthly payment for a 15-year mortgage with the same rate is $1,105. Under the conditions of a 15-year mortgage, your monthly payment would increase by $430, and neither of these anticipated payments includes the increased cost of taxes and insurance.
Less Available Cash
The higher your monthly mortgage payment, the less money you will have for other investments. Returning to the preceding illustration, you save $430 each month ($5,160 per year) that you could invest in stocks, bonds, or other assets that may yield 6% to 10% per year or more. If you invested this amount each month for 30 years in a retirement account, yielding an average annual return of 6%, you would end up with a total of $407,000. Not bad at all.
Although many people continue to view real estate as historically secure assets, you may discover that your money would be better placed elsewhere. This heavily relies on your financial objectives and risk tolerance.
Not Available for All Homes
Lenders want to ensure that you can repay them, and they also want to improve the likelihood that you will make punctual monthly payments. Therefore, they frequently reject extending 15-year mortgages on pricier residences.
Should You Refinance Your Mortgage to a 15-Year Term?
It relies on your particular circumstances and predicted financial prospects. When refinancing a 15-year mortgage, you should examine your current interest rate, budget, and individual or family aspirations.
When Should You Refinance Into a 15-Year Mortgage?
If mortgage interest rates are falling considerably, you expect to remain in your house for several years, and you are not near to paying off your mortgage, consider refinancing. However, it is essential to note that the expense of refinancing should be compensated by the savings you would realize by acquiring a new, lower interest rate.
Refinancing to a 15-year mortgage could not materially alter your monthly payment if the market has moved and interest rates are favorable. You may save substantial money on interest without straining your home budget.
Refinancing from an adjustable-rate mortgage (ARM) to a cheaper fixed-rate loan, such as a 15-year mortgage, might save you money. Your monthly payment will be steady, and you can leave a loan with variable interest rates.
When Should Not You Refinance Into a 15-Year Mortgage?
There are several reasons to avoid refinancing into a 15-year fixed-rate mortgage. These consist of the following:
Paying closing expenses: Whenever you refinance, you are required to pay closing charges. The actual closing costs may vary depending on the size of your loan, but you should anticipate paying between 3 and 6 percent of the loan amount.
If your existing mortgage has a lower interest rate than the 15-year loan you’re contemplating, refinance is not a good idea. You will pay more interest throughout the loan and would be better off making extra payments on your current mortgage to pay it off sooner.
To realize the benefits of refinancing, you must remain in the home for at least many more years. If you plan to move soon, you would be better off keeping your current mortgage.