Pay Off Your Home Prior To Passing
If youre older and dont expect to live 30 more years, Mescher says you should look at a shorter-term mortgage if you want to leave your home to your children free and clear of debt. A 15-year mortgage allows you to pay off your home debt faster, and increases the likelihood that youll own 100% of your home prior to your passing.
Of course, if youre buying a home that you dont expect to live in until the end of your life, this may not be a concern. But even then, youll still have more equity in your home with a 15-year mortgage if you decide to sell it in your later years.
What Are The Differences Between 15
A 15-year mortgage’s monthly payments are higher than a 30-year mortgage, often significantly higher. A 30-year mortgage allows a borrower to stretch out payments over a long time and keep more of their monthly earnings. A 30-year mortgage has a higher interest rate than a 15-year mortgage, and you will pay more in interest rather than principal payments on a 30-year mortgage.
When Should You Consider A 30
A 30-year mortgage is common for several reasons. One, homeowners may be able to deduct the mortgage interest on their taxes. And, especially in the first years of the loan, when most of the monthly payments are allocated toward interest, that can be a significant benefit. Plus, the monthly payments are lower and easier to manage. This makes a 30-year easier to qualify for compared to a 15-year mortgage. The 30-year can be a good option if you plan to stay in the home for several years and cant afford a 15-year mortgage. Remember, if your financial situation improves, you may be able to start with a 30-year mortgage and refinance to a shorter repayment term down the road.
There are several differences and considerations to keep in mind when choosing between a 15-year mortgage and a 30-year mortgage. Youll need to weigh the differences to see whether you benefit more from a shorter repayment term and higher payments, or a longer repayment term with lower payments. Also consider whether your financial and living situations may change. For instance, how long you might live in the home. For more personalized recommendations, use the KeyBank mortgage payoff calculator or mortgage qualification calculator.
This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice.
You May Like: How Low Of A Credit Score For A Mortgage
How Much Faster Do You Pay Off A 15 Year Mortgage With Biweekly Payments
Biweekly payments accelerate your mortgage payoff by paying 1/2 of your normal monthly payment every two weeks. By the end of each year, you will have paid the equivalent of 13 monthly payments instead of 12. This simple technique can shave years off your mortgage and save you thousands of dollars in interest.
Should I Get A 15 Year Or 30
One of the common questions people have regarding mortgages is whether a 15 year or 30 year mortgage is better? Like many financial decisions, the right answer depends on your personal financial circumstances, objectives, and concerns. What stage of life are you in right now? All of these are factors in deciding on a 15 or 30 year mortgage.
A 15 year mortgage can save you a lot of money. Using a 15 year mortgage you will pay less money to buy your home. However, your monthly payment will be higher than going with a 30 year mortgage.
So, to decide what mortgage is right for you, there are few things to consider.
Read Also: What Mortgage Can I Afford On 120k
Why Should I Get A 15
If you can afford the larger monthly payment that comes with a 15-year fixed mortgage, it can help you pay off your home, freeing up funds for retirement. You will spend less in interest over the life of the loan compared to a 30-year mortgage, and usually, a 15-year fixed mortgage means a better interest rate.
More Flexibility In Payback Terms
Cruz prefers the 30-year mortgage because it gives you the ability to speed up your payments on your own schedule.
In my opinion, they are the best option and offer much more flexibility than shorter mortgages because you can always choose to pay off a 30-year mortgage early without having to actually commit to the 15-year mortgage, Cruz explains.
One option is to get a 30-year mortgage that doesnt have any prepayment penalties, then calculate what your payment would be if you had a 15-year mortgage, and start by paying that amount monthly. This will reduce the principal faster and save a lot of interest, but it leaves you a way out if money unexpectedly tightens later on down the line.
If you do this method, you can always revert to the smaller monthly payment if you face financial hardship, Cruz says. You can move between the two payments without ever needing to refinance which would also save you thousands in closing costs.
In fact, by using this method, you can set your mortgage term to any length you want. Just calculate your original loan amount by the terms you wish to pay on your loans current interest rate, and then make your normal mortgage payment, suggests Cruz.
You May Like: Can You Lower Your Mortgage Payment
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.
Is It Better To Get A 15 Year Mortgage
What should you do if youre buying a home and taking out a purchase loan? Should you get a 15 year mortgage or stick to a traditional 30 year loan?
If you can afford a higher mortgage payment without putting other financial goals like investing on the back burner, a 15-year loan may make sense for you. Youll save thousands in interest and be mortgage-free in half the time.
But even if you can afford a 15 year mortgage, there are a few good reasons not to choose it. Because 30-year mortgages have lower monthly payments, they allow borrowers to qualify for larger loan amounts. If choosing a longer-term loan enables you to purchase your dream home, you may feel like its worth it to pay extra interest.
Thirty-year loans also give you greater financial flexibility. You wont be locked into a big mortgage payment, so youll have more money left over each month to save, invest, or spend.
Also Check: What Does Apr Mean For Mortgage
Build Up Your Emergency Fund
Even if youre in great shape with steady income now, that doesnt mean you wont ever face a job loss or expensive medical event. Those unexpected costs can devastate your finances. An emergency fund protects you in the event of financial hardship.
Before taking on any type of mortgage, especially a 15-year one, be sure youve saved up a robust emergency fund. Financial experts recommend saving enough money in an emergency fund to cover three to 6 months worth of expenses.
When calculating your emergency fund needs, look at your budget and your monthly bills. Omit any expenses that are true luxuries . Keep all fixed costs like car payments, and also include estimates of your variable expenses like utilities and food. Figure out what your mortgage payment will be on a 15-year term and be sure your emergency fund will cover it in case you lose your job or face another unexpected expense.
Monthly Mortgage Payments For 15 Vs 30
Mortgage payments on a 15-year loan will likely be several hundred dollars more than for a 30-year loan.
Imagine you take out a $250,000 loan over 15 years at 2.50%, says Tom Trott, branch manager with Embrace Home Loans. Your monthly principal and interest payments will be $1,667.
On the other hand, A 30-year mortgage on the same loan amount at 2.99% will trigger monthly payments of $1,053 $614 less, he explains.
Of course, the exact payment amounts will depend on your credit score, down payment, interest rate, and other factors. So its worth comparing both loan types before you buy to see how your options break down.
Paying Off Other Things
Part of the decision of which mortgage to choose is the consideration of other obligations you may have. If you have other debts with higher interest rates, you may want to consider paying those first, saving money in interest and payments the long run. In our example, the $700 extra youd have each month by choosing a 30-year mortgage could be used to pay down debt.
Why You Should And Shouldnt Get A 15
A home is likely to be the largest purchase of your life. Coming up with a down payment can be hard enough, so spreading out the mortgage payments over 30 years can make a home a lot more affordable. Cutting that time in half with a 15-year mortgage probably wont be a possibility with your first home.
But later in life, when youre earning more money, have more equity and plan on staying in a house for years to come, refinancing into a 15-year mortgage can make sense.
As anyone who has looked at a mortgage statement or closing papers on a house knows, the interest paid on a 30-year loan can be almost as much as the principal paid over the life of the loan. Thats one of the first reasons to consider getting a 15-year mortgage.
Read Also: How Long Does Mortgage Quality Control Take
More Mortgage Tools And Resources
You can use CNET’s mortgage calculator to help determine how much you can afford for a house and work out how to manage financially. The tool takes into account your monthly income, expenses and debt payments. In addition to those factors, your mortgage rate will depend on your credit score and the zip code where you are looking to buy a house.
Get the CNET Personal Finance newsletter
You Give Up Flexibility Needlessly
Finally, the reality is that by committing to a 15-year mortgage, you become locked into paying off your home loan early — even if the payments become too expensive or you decide you’d rather prioritize other things.
If you instead opted for a loan with a longer payoff time, you’d have the option to pay more during months you could afford to do so. If you wanted to repay a 30-year loan in 15-years and were financially able to do so, there’d be nothing to stop you — but you’d have the ability to choose.
For all of these reasons, you should seriously consider steering clear of a 15-year mortgage and opting for a different home loan instead.
Don’t Miss: Can I Combine My Mortgage And Home Equity Loan
Do You Have Money Saved For A Down Payment
Having a good sized down payment for a home can help you achieve a lower payment. This might allow you to opt for a 15 year mortgage, own your home sooner, and save lots of money over time. However, your current financial situation may be more suitable for a 30 year mortgage even with a down payment. The lower payment may allow you to focus on other financial priorities.
What Is A 15
A 15-year mortgage will be paid off completely in 15 years if you make all the payments on schedule. These mortgages typically have a fixed rate, which keeps the principal and interest rate the same for as long as you hold the mortgage. Your taxes and insurance costs can change, though.
In 2018, lenders wrote nearly 22 times as many 30-year home purchase mortgages as they did those with 15-year terms, according to NerdWallet analysis of Home Mortgage Disclosure Act data. Among loans for nonmanufactured, single-family homes, 3.6 million were for 30-year terms vs. roughly 165,000 for 15-year terms.
The monthly payment on a 15-year loan is typically much higher than that of a 30-year mortgage.
No doubt many borrowers shy away from these shorter home loans when they learn the monthly payment can be more than 50% higher around $2,017 a month for a 15-year mortgage vs. $1,318 for a similar 30-year loan, for example.
Consider the pros and cons of 15-year, fixed-rate mortgages to decide which home loan is best for you.
You May Like: Where To Find Mortgage Note
When Should You Consider A 15
A 15-year fixed-rate mortgage can be attractive because it has a lower interest rate and a shorter lifespan. The fixed rate allows you to set a budget without surprises from rising interest rates. But to take advantage of these perks, you have to be able to afford the higher monthly payment that comes with them. Plus, because the payments are higher, its more difficult to qualify for this type of loan. In short, if you can qualify and afford the higher monthly outlay, the 15-year fixed mortgage can be a great way to save money when you buy a home.
Considering A 15 Year Mortgage
With interest rates at record lows, youre probably thinking about refinancing your mortgage to save money. If you currently have a 30 year loan, you may have trouble deciding whether you should refinance into a 15 year mortgage or stick with a 30 year term.
Switching to a 15 year mortgage will enable you to pay off your home faster and save more money on interest. But refinancing into a shorter-term loan may raise your monthly mortgage payments and make them harder to afford.
To help you determine which loan term is best for you, here are the main pros and cons of 15 year mortgages.
Recommended Reading: What Is Current Mortgage Refinance Rate
How To Get A Low 15
If you want to lower the cost of homeownership, you can start by finding a way to lower your mortgage rate. The higher your mortgage rate, the more interest youll pay over the life of your home loan. Thats why its important to compare mortgage rates before committing to working with a specific lender.
The homebuyers who qualify for the lowest mortgage rates tend to have good credit scores. According to the FICO scoring model, youll likely need to have a credit score of at least 740 if you want access to the best rates. Of course, the exact credit score youll need to qualify for a 15-year fixed-rate mortgage will depend on the mortgage lender you choose to work with.
If your credit score isnt as high as it could be, it might be a good idea to work on improving your credit before you apply for a mortgage. Eliminating debt, paying bills every month on time and in full and keeping your below 30% are all things you can do to boost your credit score and put you in the best position to get a favorable mortgage rate.
While its possible to qualify for a mortgage with a low credit score , itll be more challenging and could result in a high interest rate. If this is your situation, your best bet might be to go for an FHA loan or a USDA loan. The former is designed for first-time homebuyers, while the latter is built for those buying a home in a rural area.
You Could Face A Higher Risk Of Foreclosure
If you have higher monthly payments to make, it can be harder to come up with the money during times of financial trouble. As a result, the risk of foreclosure is greater with a 15-year loan than with longer-term loans with lower required monthly payments.
You can reduce this risk by saving for emergencies, but your emergency fund will need to be bigger to cover three to six months of costlier mortgage payments.
Read Also: What Were The Lowest Mortgage Rates Ever
How To Pay Off A 30
It is possible to pay off your 30-year mortgage sooner. Heres how you can accomplish that:
- Make extra payments each month. This will not only help you chip away at your loan more quickly, but it will also lower the amount of interest you pay over the life of the loan.
- Make bi-weekly payments. Instead of making monthly contributions toward your principal and interest, this will result in 26 half-payments , translating to one extra payment per year. But check with your lender first to confirm they accept bi-weekly payments.
- Make an additional monthly payment each year. The bulk of the interest you are charged usually accumulates in the first 10 years of your loan. So, if you can make just one extra payment a year, youll get ahead.
- Refinance into a shorter term. You can refinance your home loan and get a new 15-year mortgage loan to shorten your repayment. Just keep in mind this would result in a higher monthly payment.
- Recast your mortgage. By recasting, youll reduce your mortgage balanceand your monthly paymentsvia a lump-sum payment toward the principal amount.
- Sell your house and move. If making the monthly payments is becoming too much of a burden, you could sell the house to pay off the mortgage and move to a more affordable home or area.