When a 15-year Mortgage is the Right Way to Go
The Economy is going strong and interest rates have slowly begun to tick up. There’s a lot of renewed focus on 15-year mortgages – and for good reason. So why is a 30-year mortgage the standard? For many homebuyers, it comes down to affordability, as monthly payments are lower on these longer-term loans. But for some, a 15-year (or even 10-year) is a great fit:
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 Refi?
- Those who can afford a higher monthly payment
- Those with a current interest rate at or above that of a 15-year rate (think 4% and up).
- 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.
Can you afford it? Compare your debt to your income.
When you are 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.
Retire Your Mortgage Before You Retire
If you plan to retire before your current 30-year mortgage will be 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 Could Lower Your Interest Rate
Despite slight increases, rates are still near historic lows. Do you know what your current interest rate is? There’s a chance it’s as high or higher than a current 15-year rate, meaning you could lower your rate AND shorten the life of your loan. Now that’s a win-win. The best way to know the financial benefit of refinancing is talking to one of our mortgage experts.
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. We’ll help you view everything in one place, so you can make the best decision for your unique financial situation.
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