Reasons a 15-year mortgage might be worth considering include: Long-term savings: 15-year mortgage rates are typically lower than 30-year mortgage rates. The difference reflects their shorter lifespan: Because the lender assumes fewer years of risk, it offers a better rate.
Putting just $200 more per month toward principal, you'd save $80,837 in interest and pay off the mortgage six years and four months earlier. To pay off this same mortgage in 15 years, however, you would need to put an extra $787 per month from the outset of the mortgage.
A 15-year mortgage allows you to pay off your mortgage in half the time of a 30-year mortgage. It typically comes with a lower interest rate, and you'll pay much less interest over the life of the loan.
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.
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. Conversely, if you have a 30-year mortgage, a 15-year term can help you build equity much faster.
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.
It suggests that homeowners who can afford substantial extra payments can pay off a 30-year mortgage in 15 years by making a weekly extra payment, equal to 10% of their monthly mortgage payment, toward the principal.
30-year mortgage: Because a 30-year mortgage has a longer term, your monthly payments will be lower and your interest rate on the loan will be higher. So, over a 30-year term, you'll pay less money each month, but you'll also make payments for twice as long and give the bank thousands more in interest.
Whether you should fix your mortgage for 2 or 5 years depends on you and your individual circumstances. Fixing your mortgage for 2 years can give you certainty and stability in the short-term, and can also be the right choice if you only plan on staying in your home for a few years.
You may be able to lower your mortgage payment by refinancing to a lower interest rate, eliminating your mortgage insurance, lengthening your loan term, shopping around for a better homeowners insurance rate or appealing your property taxes.
The average length of a mortgage is 30 years, but that's not the amount of time that most borrowers will keep the loan. Homeowners only stay in a home for eight years on average, and many refinance their home loans. So most folks will sign up for a 30-year mortgage but keep it for a far shorter time.
Buying a home is often the biggest financial decision you'll ever make. It's not just about choosing a place to live; it's about making a long-term investment that will impact your financial future for years to come.
The 28% rule
The 28% mortgage rule states that you should spend 28% or less of your monthly gross income on your mortgage payment (including principal, interest, taxes and insurance). To gauge how much you can afford using this rule, multiply your monthly gross income by 28%.
Paying off a typical mortgage in 15 years can save you hundreds of thousands in interest. You can do this by choosing a 15-year home loan or by prepaying a 30-year home loan. Interest rates for 15-year loans are lower, but qualifying can be harder.
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.
Refinancing back to a 30-year home loan may offer lower payments, but you'll pay more interest in the long run.
Cutting expenses, increasing income, and using windfalls to make lump sum payments can help pay off the mortgage faster. Refinancing to a shorter loan term or a lower interest rate can also help expedite mortgage payoff.
For a 15-year $200,000 mortgage with the same interest rate, your monthly payments would be about $1,797 (again, without additional costs included).
Put simply, you will save significant amounts in interest. Most mortgage contracts allow borrowers to make extra payments, and they allow all of the extra money to be applied to the principal amount of your loan. That means you are paying down the real amount of the loan – the money you borrowed – faster.
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.
How much equity should I have? Refinance requirements can differ depending on the lender, type of loan you have and your personal circumstances but having 20% equity in your home is typically advised for conventional mortgages. Refinancing with at least 20% equity can help you avoid mortgage insurance payments.