Loan Officer | NMLS #341095
Branch NMLS #1647193
Posted On March 21, 2019
When you are shopping for a mortgage loan, one of the factors that will influence the overall cost is the length of the mortgage term. Mortgages are available with a range of terms, most commonly 30-year and 15-year terms but can be as short as a 10-year or 7-year terms. The length of your mortgage term will impact how much your monthly payment is and how much interest you pay over time. A longer term mortgage will have lower monthly payments, but you will pay more in interest during the term.
For example, for a mortgage of $400,000 at an interest rate of 4%, you will pay about $287,478 toward interest costs over a 30-year term and only $132,575 toward interest costs over a 15-year term, for a saving of $154,903. Are you ready to refinance or purchase using a 15-year fixed-rate mortgage? What you need to consider:
Pros and Cons of a 15-Year Term
The major advantage of a 15-year fixed-rate mortgage is the interest savings. You will accumulate less interest during the term and build equity faster. The shorter term also means you will pay off the debt faster. However, you will have a higher monthly payment, a lower mortgage interest tax deduction, and your equity will be tied up in your home, meaning less money for other investments.
Improving Your Financial Profile
Before applying for a 15-year fixed-rate mortgage, you can take these steps to improving your financial profile. First, pay down your other debts. Simultaneously carrying a higher mortgage payment plus a car payment or other credit obligations may put a strain on your finances. Your debt-to-income ratio will also influence your mortgage interest rate and the amount for which you are approved, so the more you can lower your debt before applying for the loan the better. Additionally, try to borrow less. If you are buying a new home, see if you can put down a higher down payment. If you are planning to refinance into a 15-year fixed-rate mortgage, wait until you’ve built up a reasonable amount of equity in your home. The less you borrow, the more manageable your higher monthly mortgage payments will be.
Exploring Other Term Options
If you don’t think you can manage the monthly mortgage payments on a 15-year term, you don’t have to jump right to a 30-year term. Ask your lender about 25-year or 20-year terms. If you do choose a 30-year term, talk with your lender about making larger payments toward your principal. Find out if there are any prepayment penalties and work out a plan that benefits you.
If you are in a financial position to afford higher payments, have already paid down other debts, and are expecting an income increase, a 15-year fixed-rate mortgage might be a good option for you. A 15-year fixed-rate mortgage is a great option for home buyers and homeowners looking to grow their retirement savings and decrease their debt burden.
If you’d like to compare rates and terms on different mortgage options, check out my mortgage calculator.