You can always turn a 30 year mortgage into a 15 year, by paying the difference.
Make extra house payments.
Let's crunch the numbers. We'll say you have a $240,000, 30-year mortgage with a 7% interest rate and a monthly payment of $1,597 for your principal and interest. If you made an extra payment just once every quarter, you'd pay off your house nearly 15 years early!
It will cost about 10--20% more to pay off a 30 year mortgage in 15 years than to take a 15 year mortgage and pay it off in that time. Generally, that's how much higher mortgage interest rates are on 30-year versus 15-year mortgages, about 10--20% higher.
A 15-Year Mortgage Could Be Harder To Qualify For
Since a 15-year mortgage requires larger monthly payments, lenders have stricter requirements to ensure you can repay the loan. So, it may be harder to qualify for a 15-year mortgage than a 30-year mortgage.
15-Year Fixed Mortgage Benefits
Your interest rate is fixed for the life of the loan, so you don't have to worry about rising rates. You can buy a home with as little as 3% down. You can refinance your home for up to 97% of its value.
Guidelines For This Loan
You'll typically need a credit profile above 620. Your debt-to-income ratio (DTI) should be less than 50%. In addition to your down payment, you'll need enough funds to cover closing costs.
Some borrowers opt for the 15-year vs. a 30-year mortgage (a more conventional choice) since it can save them a significant amount of money in the long term. The 15-year mortgage has some advantages when compared to the 30-year, such as less overall interest paid, a lower interest rate, lower fees, and forced savings.
By making 2 additional principal payments each year, you'll pay off your loan significantly faster: Without extra payments: 30 years. With 2 extra payments per year: About 24 years and 7 months.
Increasing your monthly payments, making bi-weekly payments, and making extra principal payments can help accelerate mortgage payoff. Cutting expenses, increasing income, and using windfalls to make lump sum payments can help pay off the mortgage faster.
Lower interest rate: The interest rates on 15-year fixed loans are lower than those on 30-year mortgages. That lower rate, plus a shorter repayment period, can save you tens of thousands (or more) in interest. Build equity faster: Paying off your mortgage at a faster pace allows you to build equity more quickly.
If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000. Another way to pay down your mortgage in less time is to make half-monthly payments every 2 weeks, instead of 1 full monthly payment.
Home sellers often prefer to work with buyers who make at least a 20% down payment. A bigger down payment is a strong signal that your finances are in order, so you may have an easier time getting a mortgage. This can give you an edge over other buyers, especially when the home is in a hot market.
Options to pay off your mortgage faster include:
Pay extra each month. Bi-weekly payments instead of monthly payments. Making one additional monthly payment each year. Refinance with a shorter-term mortgage.
Benefits: Faster equity building: A shorter term than the 30-year mortgage means you'll build equity at a more rapid pace. Less interest over time: You'll pay off the loan quicker, leading to potential savings in interest.
The premise is simple: pay an extra 10% of your monthly mortgage payment toward the principal each week, which can allow you to pay off the loan in approximately 15 years while lowering the amount paid toward interest.
Pro 1: Pay Off Your Mortgage Faster
But if you make biweekly mortgage payments, you will be making what equates to 13 monthly payments each year. Assuming a 6.5% interest rate and biweekly payments of $252, you would pay off your mortgage in a little over 24 years, or about six years early.
The 2% rule states that you should aim for a 2% lower interest rate in order to ensure that the savings generated by your new loan will offset the cost refinancing, provided you've lived in your home for two years and plan to stay for at least two more.
Making extra payments of $500/month could save you $60,798 in interest over the life of the loan. You could own your house 13 years sooner than under your current payment. These calculations are tools for learning more about the mortgage process and are for educational/estimation purposes only.
Potentially tougher qualification requirements: Your lender will want to verify that you make enough to afford these larger payments. As such, qualifying for a 15-year loan might be harder than for a 30-year one.
A score of 620 is usually needed for a standard Conventional loan. Debt-to-Income Ratio (DTI): Aim for a DTI below 50%. This includes debts like credit cards and personal loans. A DTI over 43% might make it tough to qualify.
Conventional loans normally require a down payment of 20%, but some lenders may go lower, such as 10%, 5%, or 3% at the very least. If the down payment is lower than 20%, borrowers will be asked to purchase Private Mortgage Insurance (PMI) to protect the mortgage lenders.
670–740: Good credit – Borrowers are typically approved and offered good interest rates. 620–670: Acceptable credit – Borrowers are typically approved at higher interest rates.