A 15-year fixed mortgage is an economically efficient way to buy a home, for those who can afford it. But is it a realistic option for most people?
A 15-year fixed will almost always garner lower interest rates than a 30-year fixed, which coupled with half the number of years of paying interest, can save you significant money over the life of a loan. However, there are some realities to consider before you go down that tougher, but shorter, road.
Here are a few pros and cons to the 15-year fixed mortgage:
- Equity accrues much faster with these mortgages
- The loan will be paid off in half the time as a 30-year fixed, which means your monthly payment will go away
- You can save thousands to hundreds of thousands of dollars in interest over the life of the loan
- Monthly payments are significantly higher and this can impede cash flow for retirement or other savings
- You will have diminished ability to save up cash in preparation for emergencies or unforeseen circumstances
- If you need to refinance later to get out from under the higher payment, the loan costs could eat up the progress you made.
While you are saving substantially over the life of the loan, your monthly payment will be much higher. While that may not be an issue in the short-term, here’s how to ensure you’re covered for the long-term:
- Make sure you have a nest egg for emergencies that you can access at any time (meaning it’s not tied to your retirement)
- Make sure you are not shortchanging your retirement savings and you have enough for expenses plus a little extra each month
- Make sure you are not over-committing your monthly income to the point that it undermines your quality of life
If all those bases are covered, a 15-year fixed mortgage could be a very savvy option for those who can manage it.