Basics, Pros and Cons of 15-Year Mortgages

By October 20, 2018 Blog No Comments
Pros and Cons of Mortgages

If you’re looking for a home loan for a new house, one of the first big choices you’ll make will be regarding the term of the loan. Mortgages come in terms ranging from 15 years all the way up to 30 years, with several benchmarks in between.

At American Loans, we offer a variety of loan terms to fit your needs. In this post, we’ll look at the 15-year fixed-rate mortgage – how does it work, and what are the pros and cons?

Basics of a 15-Year Fixed Mortgage

A 15-year mortgage will be paid in 15 years so long as you keep all payments on schedule. These mortgages almost always have a fixed rate, which keeps your mortgage rate at the same level for as long as you hold the mortgage. Do know, however, that your taxes and insurance payments may change somewhat over the life of the loan – your mortgage broker can help prepare you for this.

Pros

Here are some of the benefits to a 15-year mortgage:

  • Faster equity: 15-year mortgages come with lower interest rates than longer loans due to the fact that they’re paid over a shorter period of time. This also means, however, that you pay a higher amount with each payment. This means that you’ll build equity quicker as you pay down the principal balance faster.

  • Home ownership: For those looking for outright home ownership, the 15-year loan gets you there the fastest.

  • Saving money: Lenders are exposed to fewer risks in a 15-year mortgage, so they charge lower mortgage rates. A $250,000 mortgage at current interest rates would have a total interest cost of $173,471 on a 30-year loan, but it would be just $64,890 for a 15-year loan. That’s a savings of over $100,000.

Cons

There are some potential drawbacks of a 15-year loan, depending on your situation:

  • Higher payments: Monthly payments run about 50 percent higher for 15-year loans compared to 30-year loans. You also have to factor in property taxes, insurance and possibly mortgage insurance.

  • Locked up equity: Because you build equity faster, a higher percentage of your money is tied up in savings you can only access by selling the house or borrowing with a home equity loan.

  • Opportunity cost: Using money for mortgage payments means it’s not available for other investments, such as a retirement account.

  • Less expensive qualification: Higher monthly payments mean you’ll qualify for a less expensive property than you would on a 30-year option.

  • You lose two tax advantages with 15-year loans: The mortgage interest deduction is lost sooner, and the lower rate on a loan reduces the amount of interest, which means lower tax deductions.

For more on 15-year mortgages, or to find out about any of our other options, speak to the brokers at American Loans today.

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