While 15-year mortgages tend to be less popular than their 30-year counterparts, they offer a number of benefits. For one thing, 15-year loans tend to come with lower interest rates than 30-year loans, and the shorter the life of your loan, the less money you'll spend on interest payments over time. Furthermore, paying off your home in 15 years versus 30 means you're far more likely to enter retirement debt-free. And when you're living on a fixed income, removing that burden can be a huge plus.
But while 15-year mortgages have their advantages, they also come with one major drawback: larger monthly payments. As such, they're definitely not right for everybody. Here are four reasons to avoid a 15-year mortgage and opt for a 30-year loan instead.
1. 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.
2. Your emergency fund is lacking
Though all Americans should have enough emergency savings to cover three to six months' worth of living expenses, as a homeowner, it's even more important to have ample cash reserves. That's because renters often have more flexibility in breaking their leases, and they don't have to take on the added risk and responsibility of home maintenance and repairs. If you're behind on emergency savings, you're better off signing up for lower monthly payments, which you'll get with a 30-year loan, and putting that extra money aside to build your emergency fund. Along these lines, if you don't have an emergency fund to tap, you'll be in serious hot water if you lose your job and have higher housing payments to deal with.
3. You want more flexibility in your budget
As a general rule, your housing costs should never surpass 30% of your take-home pay. If getting a 15-year mortgage causes you to exceed this threshold, you may want to reconsider. Keeping your housing expenses below that 30% limit will offer you more wiggle room in your budget. This means you'll be less squeezed financially if you're hit with an unplanned car repair, medical bill, or other sudden expense.
But more than that, keeping your housing costs on the lower side will give you the flexibility to enjoy more of your hard-earned money. If you're the type of person who relishes dining out and traveling, lower housing payments will better support that lifestyle.
4. You'll impede other financial goals
Taking on a higher mortgage payment might help you pay off your home faster, but at what cost? According to a MacArthur Foundation report, between 2011 and 2014, 52% of Americans had to make at least one major sacrifice to cover their housing payments. For some homeowners, that meant cutting back on healthcare or taking on credit card debt. For others, it meant postponing retirement savings.
If you have other money-related goals that are important to you, like paying for college or building a retirement nest egg, a 15-year loan could end up being a major impediment.
Imagine, for example, that a 15-year mortgage costs you $600 more per month than a 30-year loan, and that you pay that extra $600 during the 15-year period leading up to your child's first year of college. At the end of the day, you'll have spent $108,000 more on housing during that time, which could spell the difference between covering those tuition bills and needing loans.
Of course, paying extra each month toward a mortgage will ultimately save you money on interest. But if that savings causes you to fall short on other objectives, it may not be worth it.
While 15-year mortgages have their benefits, they're not necessarily a good move. If your income isn't steady, you don't have much savings, and you want the flexibility to spend your money on different things, then a 30-year loan is a far better choice.