Here's why it makes sense to get a 15-year home loan if it fits your finances.
There's a reason a lot of mortgage borrowers opt for a 30-year loan instead of a 15-year loan. A 15-year mortgage can come with a sizable monthly payment, since you're repaying your lender in half the time. But here's why it pays to consider a 15-year mortgage in spite of that.
1. You spend less on interest
A 15-year mortgage can save you money on interest in two ways. First, by paying off your home in half the time, you spend less because you're not carrying a loan for all that extra time. Secondly, you generally get a lower interest rate on a 15-year loan than on a 30-year loan, since your lender rewards you for repaying over a shorter period.
How much interest savings are we talking about? Based on today's interest rates, you might pay about 3.2% with a 30-year mortgage, and 2.5% with a 15-year loan. Let's assume you're buying a home for $300,000 and putting down 20% (or $60,000), at closing, leaving a $240,000 loan balance. With a 30-year loan, you'd spend $133,839.36 on total interest. With a 15-year loan, you'd spend $47,971.66. That's $85,867.70 in savings you'll reap by paying off your mortgage in half the time.
Keep in mind that your specific savings depend on the loan amount and the interest rates available to you at the time. But it's usually possible to save quite a bundle on mortgage interest with a 15-year loan.
2. You're debt free sooner
Mortgage debt is generally considered healthy debt, whereas credit card debt is considered problematic. But some people just plain don't like the idea of having any debt, and if you're one of them, a 15-year mortgage could be a better fit for you. That way, you pay off your home sooner, and then you don't have to worry about owing money to anyone, assuming you incur no other debt.
3. You're more likely to shed your mortgage prior to retirement
There's no rule stating that you have to pay off your home by the time retirement rolls around. But entering retirement mortgage free is a goal worth aiming for. Once you retire and rely on a fixed income, you may find that money is tighter than when you were working. This holds especially true if you don't retire with a lot of savings, and primarily rely on Social Security benefits to cover your expenses. Taking out a 15-year mortgage can help you increase your options in retirement.
It can be hard to afford the higher monthly payments that come with a 15-year mortgage. You may also want to do other things with your money, and making a higher payment each month could prevent you from meeting those goals. But if the larger monthly payments work for you, paying off your home in 15 years can do a lot of great things for your finances.
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