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A 15 year fixed year mortgage is a loan that will be completely paid off in 15 years assuming all payments are on schedule. As the name implies, this type of mortgage has a fixed rate, which keeps the payment and interest rate the same for as long as you hold the mortgage. Many people don't realize the financial advantages of choosing a fixed 15 year mortgage. In this kind of mortgage, the borrower not only pays less interest over time, but typically obtains a lower interest rate than on a traditional 30 year mortgage.
Depending on where you are in the home loan process, you'll probably hear the terms fixed versus adjustable rate at some point. In fact, these terms are so common in the mortgage industry that as a borrower, one of the very first things you'll need to do is decide between a fixed rate and an adjustable rate mortgage, also known as an ARM.
A key factor when choosing between the two is knowing how long you expect to live in your home. If you only plan to stay in the home for a short time before selling, then an adjustable rate loan could be your best option. The teaser interest rate in an ARM is lower than a fixed rate for a few years. However, keep in mind that if rates rise at the end of your introductory period you risk a rate adjustment, which could result in a payment increase in the future.
Conversely, if you are planning to live in and/or own the home for a long time, then a fixed rate loan is generally a safer choice, guaranteeing a consistent, fixed payment.
A 15 year fixed loan can be a smart choice depending on your current income and future goals. One way to look at a 15 year fixed loan is "short term pain for long term gain". Meaning, you face higher monthly mortgage payments than other longer-term options, but as a result, you will pay down your note much faster. Thus, if your goal is to become debt-free by a certain point in life, or you simply desire to devote your money to other obligations such as child's college tuition or retirement savings, then this loan can help you meet those financial goals.
Another important reason as to why you might want to opt in to a 15 year fixed term loan is the amount of money you could potentially save over the life of the loan. The shorter you keep your loan term, the less time there is for interest to compound on your balance. In addition, a fifteen-year loan typically carries lower interest rates when compared to different terms. In fact, when evaluating overall interest paid over a 30 year term, those borrowers who take on a 15 year loan can save thousands of dollars in interest.
Before you decide to take on a 15 year fixed term mortgage, it is important to assess whether you are able to sustain the higher monthly cost. If you consider yourself someone with a reliable income and self-discipline to commit to a higher monthly payment, then you could be mortgage-free in just fifteen years. loanDepot can provide you with pricing and amortization schedules for all of our loan terms, so you can make an informed decision.
Bottom line is that you never want to sign up for a mortgage term you cannot afford. Consider the following pros and cons to determine whether a 15 year fixed mortgage could work in your favor.
Lower Interest Rate
The reason you will typically notice a lower interest rate associated with a shorter term loan is due to the reduced risk assumed by the lender. A 15 year fixed mortgage will compound less overall interest than a longer term, which can ultimately translate to massive savings over the life of the loan.
Pay Mortgage Off Sooner
Choosing a 15 year mortgage dramatically cuts your home loan repayment time. A 15 year mortgage minimizes your total borrowing costs and can allow you to eliminate debt quickly. By opting in for a shorter mortgage term, you will pay down substantially more principal in fewer years, thus building equity at a much faster rate.
Accumulate Equity Faster
Building equity is one of the primary financial benefits of homeownership. When you pay down your mortgage faster, you not only save substantially on interest, but build equity at an accelerated rate. Thus, if your main goal is to build equity, it would be advantageous to choose a shorter term such as a 15 year fixed.
Higher Monthly Payment
One of the main disadvantages of a shorter mortgage term is an increased monthly mortgage payment. However, a monthly mortgage does not tell the whole story of potential savings. The 15 year fixed mortgage term can be a great vehicle for reducing thousands of dollars in interest over time and helping you become mortgage-free sooner.
Although you will accumulate equity at a faster rate with a 15 year mortgage, you may also be required to sell the property in order to access this pool of savings. Therefore, if a large chunk of your life savings is tied up in your home, it may be harder to access these funds during a time of emergency.
As mentioned above, having a large part of your savings locked up in one asset alone could hinder your ability to contribute to other areas such your 401k, child's college tuition, or stocks. If your monthly payment consumes a large chunk of your take home pay, you may not be able to leverage additional investment opportunities.
Less Purchasing Power
When you choose a 15 year loan, you have less purchase power, meaning you will typically qualify for a less expensive property than if you had expanded the loan over a 30 year term. This could be a problem to some, especially if you need additional square footage, or have your heart set on a specific neighborhood.
*** After evaluating all the pros and cons, does saving money on interest and paying off your mortgage faster than a traditional term still sounds good? If so, let's take a look at an example:
Comparing a $300,000 fixed rate mortgage for 15 years at 4.875% (APR 4.986%) and a mortgage for 30 years at 5.375% (APR 5.443%), you get the following results (not including homeowner's insurance, property taxes or private mortgage insurance):
As illustrated above, you will have saved roughly $181,248 ($604,768 less $423,520) in total interest by opting in for a 15 year fixed mortgage.
The above example is for illustration purposes only and uses the following scenario to compare a 15-year fixed and a 30-year fixed rate loan. Rate assumes a $300,000 loan amount, 80%LTV with a credit score of 740+. Loan limits may apply.
One of the reasons as to why you might want to consider refinancing your mortgage to a shorter 15 year fixed is to expedite the goal of paying off your home. If you originally took out a 30 year mortgage and have fifteen years left today, it could be beneficial to refinance, especially if the 15 year term offers a lower interest rate than your original note. Other factors such as an improved credit score could also help you leverage the best rates available.
Speak with a qualified lending professional about whether it makes financial sense for you to refinance to a 15 year fixed term mortgage. In general, if you could obtain a lower interest rate, and the lifetime savings in interest outweigh any refinance costs, then a refinance could set you on an accelerated path to becoming mortgage-free.
A loanDepot loan consultant can advise you on whether this kind of refinance can make financial sense. Using a mortgage refinance calculator can also help you shop for the best mortgage.
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