You'll Save Thousands Of Dollars
Another advantage of a 15-year mortgage is all the money you'll save on interest. Lenders charge a lower interest rate for 15-year loans because it's easier to make predictions about repayment over a 15-year horizon than a 30-year horizon.
The main reason to consider a 15-year note over a 30 year is that the interest rate is typically lower. At today's rates, the difference is about 0.25%. For a 15 year mortgage at 3.75%, where the monthly P&I would be $5817; it means a difference of $1998.
A 15-year mortgage forces you to buckle down and get rid of the debt in half the time compared to a 30 year. As an added bonus because your term is shorter, you'll get a better interest rate which could be anywhere from a quarter to a half of percent, which makes a big difference over time.
Cons: Higher total interest: With a 30-year mortgage, you'll likely have a higher interest rate compared to a 20-year mortgage. Additionally, you'll be making monthly payments for ten years longer, so you'll pay considerably more interest cumulatively.
Here's why some homebuyers may not want to opt for a 30-year uninsured amortization. 30-year amortizations typically have higher interest rates, so not only will you be paying a higher rate, but you'll also be doing so over a longer duration, compounding the total interest you will pay over the life of the mortgage.
"If you want to find financial freedom, you need to retire all debt — and yes that includes your mortgage," the personal finance author and co-host of ABC's "Shark Tank" tells CNBC Make It. You should aim to have everything paid off, from student loans to credit card debt, by age 45, O'Leary says.
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.
Benefits of a 15-year fixed mortgage
The difference reflects their shorter lifespan: Because the lender assumes fewer years of risk, it offers a better rate. Faster accumulation of home equity: By paying back the loan's principal faster, you'll build equity sooner in your home.
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.
Most homebuyers choose a 30-year fixed-rate mortgage, but a 15-year mortgage can be a good choice for some. A 30-year mortgage can make your monthly payments more affordable. While monthly payments on a 15-year mortgage are higher, the cost of the loan is less in the long run.
On a 30-year loan, your monthly payment will be lower, but you'll gain equity at a slower rate. If you originally got a 15-year mortgage but find the payments challenging, refinancing to a 30-year loan can lower your payments by as much as several hundred dollars each month.
Why is a 15-year fixed-rate mortgage better than a 30-year? 15-year refers to the term, or length in years, of the mortgage. With a 30-year mortgage, you'll end up paying almost twice the price of the house.
Cons of 15-year Mortgages
The higher monthly payment may be too much for many people's budget. For example, not including taxes and insurance, in January of 2020, you would pay approximately $1,411 per month for a 15-year, $200,000 loan. A 30-year, $200,000 loan (without insurance and taxes), would be $898 per month.
Current mortgage interest rates in California. As of Monday, January 13, 2025, current interest rates in California are 7.33% for a 30-year fixed mortgage and 6.61% for a 15-year fixed mortgage.
When you get a 30-year fixed-rate loan, your mortgage lender's risk of not getting paid back is spread over a longer period of time. For this reason, lenders charge higher interest rates on loans with longer terms.
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. There are, however, some disadvantages, such as higher monthly payments, less affordability, and less money going toward savings.
You will complete a mortgage application and the lender will verify the information you provide. They'll also perform a credit check. If you're preapproved, you'll receive a preapproval letter, which is an offer (but not a commitment) to lend you a specific amount, good for 90 days.
Do you have a 15- or 30-year fixed-rate loan that you'd like to pay down faster? You might find that making extra payments on your mortgage can help you repay your loan more quickly, and with less interest than making payments according to loan's original payment terms.
If you pay an extra $200 a month toward the principal, you can cut your loan term by more than 5½ years and save $98,277 in interest. If you increase the extra payment by $400 per month, you not only shorten your mortgage by nine years, you save $159,602 in interest.
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.
You decide to increase your monthly payment by $1,000. With that additional principal payment every month, you could pay off your home nearly 16 years faster and save almost $156,000 in interest.
Age doesn't matter. Counterintuitive as it may sound, your loan application for a mortgage to be repaid over 30 years looks the same to lenders whether you are 90 years old or 40.
"Shark Tank" investor Kevin O'Leary has said the ideal age to be debt-free is 45, especially if you want to retire by age 60. Being debt-free — including paying off your mortgage — by your mid-40s puts you on the early path toward success, O'Leary argued.
An unmortgaged home was once a retirement perk
Mark Iwry, nonresident senior fellow at the Brookings Institution. But that pattern is changing. In the Michigan study, researchers found that the share of retirement-age homeowners with mortgages rose from 38% to 51% in a generational span of about 25 years.