When a 15-year mortgage is the right way to go
When is a 15-year mortgage the right way to go?
Regardless of the current interest rate environment, it’s always wise to explore a 15-year mortgage as an option when you purchase a new home. Of course, the 30-year mortgage is the industry standard due to its affordability for most people, since the payments are lower. For many others, however, a 15-year note (or even a 10-year) fits better.
Let’s look at a few key advantages of going with a 15-year mortgage and who would benefit most from a 15-year note on their house.
Key advantages of a 15-year vs. a 30-year mortgage
- Pay your home loan off sooner
- Pay significantly less in interest over time
- Possibly lower your rate
- Carry less debt into retirement
Who benefits most from a 15-year mortgage?
- Those who can afford a higher monthly payment
- Those with a current interest rate at or above that of a 15-year rate
- Those who want to pay off their home before retirement or earlier in retirement
Pay it off sooner, with less interest
With a shorter term and higher monthly payment, you’ll pay more toward your principal while paying less in interest — meaning you’ll also pay off your home in a shorter amount of time. Let’s take a look at an example of how you’d pay less overall with a 15-year mortgage compared to a 30-year loan.
Let’s pretend you’re getting a loan for $250,000. Going off a 7.73% interest rate, your monthly payment would be about $1,857 per month for 30 years, so you’ll pay back $643,320 on your mortgage (not including taxes, insurance, and other fees). With a 15-year note, however, you’ll pay roughly $2,350 per month for 15 years for a total of only $423,000! That’s using the same rate as the 30-year mortgage, and typically interest rates are lower for 15-year loans, so you’d likely pay back even less.
Your debt-to-income ratio matters
When you’re looking at your overall debt-to-income ratio, aim for a percentage under 35%. If your annual household income is $100,000, you want to keep your total annual debt under $35,000. If you currently have a 30-year mortgage and you’re near — or over — 35%, now may not be the time to switch to a 15-year mortgage. However, if your debt is below 35%, switching to a 15-year mortgage will allow you to pay off your mortgage faster by making higher principal payments. Your payment amount goes up, but since it’s being applied to more principal than a 30-year mortgage, you’ll pay less interest over time.
What is your income outlook?
Do you anticipate that your annual earnings will continue to increase? Are you in your prime earning years? If so, it’s likely that shifting additional funds toward your mortgage will not detract from your standard of living. As your income continues to increase, you’ll feel more comfortable with the amount of discretionary income left over after your mortgage payment.
If you plan to retire before your current 30-year mortgage is paid off, a 15-year mortgage will speed up your repayment and give you the peace of mind of owning your home free and clear before you transition into retirement.
You may already have a head start
If you purchased your home seven or more years ago, you’ve already made a significant dent in your original mortgage. You can use that equity (the difference between the amount your home is worth vs. what you owe on your mortgage) to reduce the starting balance on a 15-year note.
Our experts are here to help
UBT has resources to give you a complete look at your finances. If you’re considering refinancing or would like to explore a 15-year option when you purchase a new house, one of our helpful, friendly loan officers would be happy to chat with you about your income, debt, and monthly obligations to see if a 15-year mortgage is the right option for your finances.
