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.
Disadvantages of a 15-year fixed mortgage
Larger monthly payments: A loan term that's half as long means your monthly payments will be larger than they would be with a 30-year mortgage. Potentially tougher qualification requirements: Your lender will want to verify that you make enough to afford these larger payments.
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.
Because you'll pay less in interest with a 15-year mortgage, you'll save money during the life of your loan. With a 15-year mortgage, your monthly payments will be larger, but you'll build home equity faster. You'll want to consider your monthly budget to determine whether larger payments are feasible.
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. Another reason for the savings? Home buyers are borrowing money for half the time, which dramatically reduces the cost of borrowing.
Higher Interest Rates:
In general, home equity loans often come with higher interest rates compared to primary mortgages or other types of secured loans. One reason for this is that home equity loans are often in the second lien position, meaning they are subordinate to the primary mortgage.
The downside to choosing a personal loan with a longer repayment term is paying more in interest charges over the life of the loan. Since lenders charge interest payments monthly, a longer loan term inherently means more interest payments.
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.
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.
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.
15-year mortgages typically have lower interest rates and help you save money on interest by paying off your mortgage faster. You can generally build your home's equity faster and pay off your mortgage more quickly with a 15-year loan, too.
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.
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.
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.
An increase in your monthly payment will reduce the amount of interest charges you will pay over the repayment period and may even shorten the number of months it will take to pay off the loan.
Borrowers who prefer lower monthly installments and do not want to overburden themselves financially should opt for a long-term loan. However, those who want a quick disbursal and can bear a high-interest rate can choose a short-term loan.
Short term loans are called such because of how quickly the loan needs to be paid off. In most cases, it must be paid off within six months to a year – at most, 18 months. Any longer loan term than that is considered a medium term or long term loan.
However, the biggest impacts on your monthly payment and overall costs are your repayment term and interest rate: a $100,000 mortgage with a 30-year term could have a monthly payment of $599.55 to more than $768.91 while a 15-year loan might have payments ranging from $843.86 to $984.74.
The easiest and most fruitful way for homebuyers and existing homeowners to lower their mortgage rate is to compare rates among lenders, but borrowers can also be opportunistic by taking out a mortgage in January when rates tend to be at seasonal lows.
The lowest average rate for the 15-year, fixed-rate home loan came in at 2.10% in July of 2021.
Key Takeaways
Don't take out a home equity loan to consolidate debt without addressing the behavior that created the debt. Don't use home equity to fund a lifestyle your income doesn't support. Don't take out a home equity loan to pay for college or buy a car. Don't take out a home equity loan to invest.
The interest on a home equity loan is tax-deductible, provided the funds were used to buy or build a home, or make improvements to one, as defined by the IRS.
Home Equity Loan Disadvantages
Your Home Will Be Used As Collateral: Failure to make on-time monthly payments will hurt your credit score. If you default on the loan, the lender can take possession of the home through a foreclosure.