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Is It Harder To Get A 15 Year Mortgage

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Shop And Compare Mortgage Rates

Figuring out how much house you can afford is the first step toward homeownership. To compare rates and get a better idea of what your budget is, experts recommend you apply for a prequalification or preapproval through multiple lenders. Not taking the first rate offered has been shown to save borrowers thousands over the life of a loan.

If youre still testing the waters, a prequalification letter can give you an estimate of what a lender would loan you based on self-reported information regarding your income, credit and DTI. But should you be ready to take the plunge, obtaining a mortgage preapproval letter can give you a realistic idea of your loan options, interest rates and how much house you can afford.

A preapproval letter states the loan amount that youre eligible for based on a thorough examination of your finances. To obtain a mortgage preapproval, youll have to provide proof of income, credit history, debts, assets and rental history.

That said, getting pre-approved involves a hard credit pull which may lower your credit score by a few points but there are ways you can reduce the impact on your credit. Most credit models weigh multiple hard inquiries for mortgages as one inquiry if they are made within 14 to 45 days.

Mortgage pre-approval letters are generally valid for 60 to 90 days and most are completed within 10 business days. Pre-qualifications, on the other hand, are ready within minutes.

Potentially Less In Fees Due To Fannie Mae And Freddie Mac

If your mortgage is purchased by one of the government-sponsored companies, like Fannie Mae, you will likely end up paying less in fees for a 15-year loan. Fannie Mae and the other government-backed enterprises charge what they call loan-level price adjustments that often apply only to, or are higher for, 30-year-mortgages.

These fees typically apply to borrowers with lower credit scores who make down payments less than 20%. Private mortgage insurance is required by lenders when you make a down payment thats smaller than 20% of the homes value.

If you find yourself in this situation, you will pay lower mortgage insurance premiums if you take out a 15-year mortgage.

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Less In Total Interest

A 15-year mortgage costs less in the long run since the total interest payments are less than a 30-year mortgage. The cost of a mortgage is calculated based on an annual interest rate, and since you’re borrowing the money for half as long, the total interest paid will likely be half of what youd pay over 30 years. A mortgage calculator can show you the impact of different rates on your monthly payment, as well as the difference between a 15- and a 30-year mortgage.

Is It Harder To Qualify For A 15

Buying a Home When You

It can be harder to qualify for a 15-year mortgage as youll have to show that you can manage the higher monthly payments and shorter repayment timeline. Eligibility criteria for a 15-year loan can vary by mortgage lender, but common requirements usually include good to excellent credit, verifiable income and a low DTI ratio.

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Comparing Longterm Mortgage Costs

Finally, youll pay much less in total interest costs for a 15year loan than you would for a 30year mortgage.

There are two reasons for that. First, because your interest rate is likely to be lower. And second, because youre not paying interest for as long a time.

Using Trotts example above, youd pay around $129,000 in total interest on a 30year loan as opposed to about $50,000 on a 15year loan thus saving over $78,900 with the shorter term.

You can use a mortgage calculator to model your monthly payments and total interest on both loan types to see how they compare.

But How To Pay The Extra Amount

It would be nice if that $555 in monthly savings was in your pocket from the beginning. But its not. Its the savings youll see after the loan is paid off.

The main difficulty with a 15-year loan is increasing your monthly payment. In the above case, its by $466. Putting that $555 monthly savings into the mortgage would more than pay for it.

But where do homebuyers get money now so they can afford a much higher mortgage each month for the next 15 years?

Because less than 10 percent of homeowners have 15-year mortgages, Bechtel says its not an option for everyone, mainly because of the higher payments.

Its not for the faint of heart, he says.

Borrowers should make sure they have enough income to afford it, are able to manage their household debt, and have money in liquid savings for emergencies, he suggests. This is mainly why 15-year mortgages are more of a refinancing option, says Bechtel, who bought his house with a 30-year loan and later refinanced into a 15-year loan that now has six years remaining.

If Im going to swallow a bigger monthly nut, knowing that Ill save a ton of money in the long run, Bechtel says, a borrower needs confidence in their job prospects or have enough money in savings to cover the higher mortgage if they lose their job or their salary drops.

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Pay Off Your Mortgage Quicker

Some people who take out ARMs or 30-year fixed mortgages like to tell themselves they will pay off the mortgage sooner. Having lower monthly payments and the option to pay off their mortgage sooner is a nice combination. However, in my experience, Ive found we seldom stick to our mortgage payoff intentions.

For example, in 2003, I had a goal of paying off my 30-year fixed mortgage in 10 years. But I ended up refinancing the property after one year to a lower 30-year fixed mortgage. Then I wised up and refinanced the mortgage to an ARM several years later. Instead of paying off the mortgage in 2013 as planned, I paid it off in 2017.

Not only was I tempted by my new lower mortgage rate, I simply didnt pay down extra principal as regularly as I had anticipated.

With a 15-year mortgage, you can be the most unfocused person. You are guaranteed to pay off your mortgage in 15 years if you keep making your payments.

Interest Rates For 15year Vs 30year Mortgages

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Traditionally, a 15year mortgage loan comes with a lower interest rate than a 30year mortgage. Thats because, by agreeing to pay off the debt more quickly, 15year borrowers present less risk to mortgage lenders.

Differences in rates between 30year and 15year options have ranged, on average, from 0.5% to 0.75%, says Rob Heck, head of origination at Morty.

Just look how 15 and 30year mortgage interest rates compare over the past six months, based on survey data from Freddie Mac:

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Your Income Isn’t Reliable

Maybe you work on commission, or own a business that sees its fair share of ebbs and flows. No matter the exact circumstances, if your income isn’t steady or predictable, a 15-year mortgage could spell trouble because of the higher monthly payment it imposes upon you.

Imagine you have a couple of months where you bring home only half of what you typically earn. If you have a higher mortgage payment to keep up with, you might have trouble covering your other expenses, which opens the door to credit card debt. And if your unlucky streak continues for many months at a time, you could risk losing your home. In the absence of a steady, dependable paycheck, you’re better off keeping your housing costs as low as possible, and that means sticking to a 30-year mortgage whose payments are lower.

How To Save Money On A 30

When you close on your mortgage, your lender will be required to show you a Truth in Lending report.

This report will show you how much youll pay for your home based on the interest and payment schedule your mortgage requires.

If you were borrowing $250,000 for 30 years at 4 percent interest, for example, your Truth in Lending report would show $429,674 as the full price.

This is a frightening moment for many homebuyers. Are we getting ripped off? Can we really afford this? Should we have shopped around some more?

Most of us go right ahead and sign the loan papers, move into the home, and make payment after payment, steadily chipping away at that huge number as the years go by.

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You’ll Have Less Flexibility For Your Money

There are a few problems with paying more each month on a 15-year loan. First, while you can always make larger payments than the minimum if you want to, you can’t make smaller payments without facing fees and the potential risk of foreclosure. A 30-year loan with much smaller monthly payments could be paid off in 15 years if you wanted to pay more toward it. But once you commit to a 15-year mortgage, you can’t decide you’d rather take more time to pay off the loan when you hit a financial speedbump.

Second, the higher monthly payments mean you have less money to do things like pay down other more expensive debt or invest. You’re significantly limiting the potential return on investment you’re making from your money. The ROI you’ll get from paying the 15-year loan is only the interest saved. And when mortgage rates are as low as they are now, that isn’t a high ROI. By contrast, investing in an S& P 500 index fund provides average annual returns of around 10%. So your money could do more for you if you didn’t tie it up in an expensive mortgage.

If you end up with less total wealth or you face serious struggles paying your high mortgage payment, you could regret taking out a 15-year loan. It’s worth considering these potential outcomes before you decide what mortgage is right for you.

See Other Mortgage Types

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Avg. Days on MarketHome Costs as % of Income

Methodology A healthy housing market is both stable and affordable. Homeowners in a healthy market should be able to easily sell their homes, with a relatively low risk of losing money. In order to find the big cities with the healthiest housing markets, we considered the following factors: stability, affordability, fluidity and risk of loss. For the purpose of this study, we only considered U.S. cities with a population greater than 200,000.

We measured stability with two equally weighted indicators: the average number of years people own their homes and the percentage of homeowners with negative equity. To measure risk, we used the percentage of homes that decreased in value. To determine housing market fluidity, we looked at data on the average time a for-sale home in each area spent on the market – the longer homes take to sell, the less fluid the market. Finally, we calculated affordability by determining the monthly cost of owning a home as a percentage of household income in each city.

Affordability accounted for 40% of the healthiest markets index, while each of the other three factors accounted for 20%. When data on any of the above four factors was unavailable for cities, we excluded these from our final rankings of healthiest markets.

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How To Qualify For A Fifteen Year Fixed Rate Mortgage

Many home buyers prefer a 15-year fixed-rate mortgage loan to the 30-year fixed-rate variety. The benefit is obvious: You’ll pay off your home loan faster when you take out a 15-year loan. By doing this, you can save more than $150,000 in interest payments during the life of your loan depending on its size and the interest rate that you get with your 15-year mortgage. To qualify for a 15-year mortgage loan, though, you’ll have to prove to your bank or lender that you can afford to make the higher monthly payment that comes with this shorter-term mortgage.

  • 1.

    Make copies of the financial paperwork that you’ll use to prove that you can afford the monthly payment on a 15-year fixed-rate mortgage loan. These documents include your last two paychecks, last two federal income tax returns and your most current bank savings and checking account statements. Make copies, too, of your most recent credit card and other loan statements.

  • 2.

    Shop around for the right mortgage lender or bank for you. Different banks and lenders charge different fees and offer different interest rates. When you find a lender with whom you are comfortable, tell your loan officer that you are interested in taking out a 15-year fixed-rate mortgage.

  • 5.

    Sign the closing papers that make your new 15-year fixed-rate mortgage a reality if your credit scores and gross monthly income are high enough to earn you an approval from your lender.

  • References

    The Advantages Of A 15

    While the 15-year mortgage term isnt as popular as the 30-year option, it has several major advantages for people who can afford the higher monthly payments. The biggest benefit is that instead of making a mortgage payment every month for 30 years, youll have the full amount paid off and be done in half the time.

    Plus, because youre paying down your mortgage more rapidly, a 15-year mortgage builds equity quicker. Equity is the value of your interest in your home, meaning the part you own outright, rather than it being subject to the lenders mortgage.

    Having more equity in your home plays to your advantage if you sell your home before your mortgage is over, or if you need to take out an additional loan on your home, such as a home equity line of credit. Its also easier to refinance an existing mortgage if you have significant equity in your home.

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    How To Get A Good 15

    Lenders take your finances into consideration when determining an interest rate. The better your financial situation is, the lower your rate will be.

    Lenders look at three main factors: down payment, credit score, and debt-to-income ratio.

    • Down payment: Depending on which type of mortgage you take out, a lender might require anywhere from 0% to 20% for a down payment. But the more you have for a down payment, the lower your rate will likely be. If you can provide more than the minimum, you could snag a better rate.
    • : Many mortgages require at least a 620 credit score, and an FHA loan lets you get a mortgage with a 580 score. But if you can get your score above the minimum requirement, youll probably land a better interest rate. To improve your score, try making payments on time, paying down debts, and letting your credit age.
    • Debt-to-income ratio: Your DTI ratio is the amount you pay toward debts each month in relation to your monthly income. Most lenders want to see a minimum DTI ratio of 36%, but you can get a lower mortgage rate with a lower ratio. To decrease your DTI ratio, you either need to pay down debts or consider ways to increase your income.

    You should be able to get a low 15-year fixed rate with a sizeable down payment, excellent credit score, and low DTI ratio.

    Easier To Get Positive Cash Flow On A Rental Property

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    If youre buying a rental property, or if you might convert your personal residence into a rental later, itll be easier to turn a monthly profit on the property with a longer mortgage term and a lower monthly mortgage payment.

    In order to get positive monthly cash flow from a rental property, the rental income needs to exceed the propertys monthly expenses, repairs and mortgage payment, explains Mescher. With a 30-year mortgage, the monthly payment is less, so you can achieve positive cash flow even when the rental income is lower, she adds.

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    Here’s What Ramsey Thinks About 15

    Ramsey is well-known for being opposed to borrowing money. He has taken a strong anti-debt stance, arguing that debt is an obstacle to becoming wealthy in almost all situations.

    “The shortest path to wealth is no debt,” he explained on his show, to a caller who asked about borrowing for a home or paying cash. He indicated borrowing would simply not be an option for him personally, even if getting a loan was needed to buy a house.

    However, unlike other kinds of borrowing — such as credit card debt — Ramsey isn’t categorically opposed to taking out a mortgage. The only catch is, he thinks a 15-year loan is the only kind of loan you should consider.

    “Having said that, I don’t yell at people for getting a mortgage — a 15-year fixed-rate mortgage and pay it off as fast as you can,” Ramsey went on to tell the caller. However, he continued with another caveat, reiterating that “between us, the shortest path to wealth is debt-free.”

    Ramsey has also reaffirmed his belief that a 15-year mortgage is the best choice both on Twitter and in multiple blog posts. He tweeted out, “Never buy a house on more than a 15-year mortgage,” and explained on his blog that there are three key reasons he recommends a 15-year loan, including the ability to save tens of thousands of dollars in interest, a faster path to building equity, and the ability to become debt-free 15 years sooner.

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