A 15-year mortgage can be a poor choice because it requires significantly higher monthly payments compared to a 30-year loan, reducing financial flexibility for investments, emergencies, or other expenses. While it saves on interest, the strict budget requirement limits buying power and increases the risk of financial hardship if income is disrupted.
Potential drawbacks of a 15-year mortgage include: Higher monthly payments: A 15-year mortgage generally has a higher minimum monthly payment than a 30-year mortgage. This is because you're paying back the same principal balance (the original amount you borrowed) over a shorter period of time.
The 15-year mortgage has some advantages when compared to the 30-year (a more conventional choice), 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.
Dave Ramsey strongly advocates for 15-year, fixed-rate mortgages as the quickest path to wealth, emphasizing lower total interest, faster equity building, and less debt, asserting that if you can't afford the higher payments, you can't afford the house; he recommends buying with cash if possible, but a 15-year loan is the preferred borrowing option, keeping your payment under 25% of your take-home pay.
When you make an extra payment or a payment that's larger than the required payment, you can designate that the extra funds be applied to principal. Because interest is calculated against the principal balance, paying down the principal in less time on your mortgage reduces the interest you'll pay.
The 3-7-3 Rule in mortgages isn't a loan type but a federal timeline from the TILA-RESPA Integrated Disclosure (TRID) rule, ensuring borrower protection by mandating disclosures within 3 business days of application, a 7-business-day wait between the initial Loan Estimate and closing, and another 3-day wait if significant changes (like APR) occur, giving borrowers time to review costs before committing to a loan.
The main downsides of prepaying are tying up cash that could earn more elsewhere (like investments), potential prepayment penalties from lenders, reduced liquidity for emergencies, and missing out on the time value of money, especially if your loan interest rate is low; it also means losing potential tax deductions and can complicate financial aid.
Suze Orman strongly advocates paying off your mortgage by retirement for financial freedom and peace of mind, but her advice on how varies by situation, often prioritizing a solid emergency fund and retirement savings first, especially if interest rates are low. While she pushes for paying down debt aggressively (even reducing retirement savings beyond the 401(k) match), she cautions against draining savings for low-interest mortgages if it leaves you vulnerable to job loss or emergencies, suggesting you should have a strong safety net before using savings to pay it off.
15-year loan interest rates are usually lower than 30-year loan interest rates. This is one reason you'll probably pay less interest over the life of the loan with a 15-year mortgage, compared to a 30-year mortgage. The shorter loan term often decreases the cost of your interest, too.
Skeptics of the 15-year mortgage argue that it is less affordable on a monthly basis, and puts people in a position of prioritizing the repayment of their mortgage over the other conveniences a lower monthly payment can bring.
Many lenders impose an age cap at 65 - 70, but will allow the mortgage to continue into retirement if affordability is sufficient. Lender choices become more limited, but some will cap at age 75 and a handful up to 80 if eligibility criteria are met.
Risky spending habits
But frequent and large transactions to betting shops or gambling sites can be a major red flag. It suggests risky spending habits, which may raise concerns on whether you'll prioritise mortgage repayments.
Paying an extra $500 a month on your 15-year mortgage drastically shortens your loan term, saves you tens of thousands in interest, builds equity faster, and helps you become mortgage-free years sooner, effectively turning your 15-year loan into a much shorter one, potentially paying it off in less than 10 years depending on your loan details.
So a mortgage is the one kind of debt we don't yell at you for. But if you go that route, stick to the 25% rule—remember, that means never buying a house with a monthly payment that's more than 25% of your monthly take-home pay.
The average age to pay off a mortgage in the U.S. is around 62, with many becoming mortgage-free in their early 60s, coinciding with or just after typical retirement age, though figures vary by source. While some financial experts suggest paying it off by 45 for aggressive investing, data shows a significant portion of homeowners, especially older ones (60+), are mortgage-free, but increasingly, older adults (60s, 70s, 80s) carry more mortgage debt than previous generations, according to Marketplace.
You generally need a credit score of at least 620 to qualify for a conventional mortgage, though every lender is different. FHA loans, which are backed by the federal government, may be an option for individuals with credit scores as low as 500.
“Paying off your mortgage early seems impossible but it is completely doable and people do it all the time, but how can you do it and why would you want to put in the extra effort? Paying off your mortgage early will rev up your wealth building.”
When you make a principal-only payment on your simple interest contract, those funds directly reduce your outstanding principal balance. This means you'll pay less interest on the lower principal balance and save money over the life of the contract.
Prepayment penalties may apply: Some personal loans charge prepayment penalties when you pay your loan off early. These might be flat fees or may be calculated as a percentage of your loan balance. Either way, prepayment penalties cut into your net savings and may even wipe out the benefit of prepaying your loan.