by Christy Bieber | Feb. 17, 2021
Will these reasons prompt you to consider a 15-year loan?
When you apply for a home mortgage, one of the first choices you'll need to make is how long you want your repayment term to be. The most popular options are the 30-year and 15-year home loan, and most people choose the 30-year payoff timeline with good reason. A 30-year loan provides a good balance between keeping your payments affordable each month and becoming debt free on a reasonable timeline.
When I recently refinanced one of my mortgages, however, I actually opted for the 15-year loan instead. This may come as a surprise, since I've advocated against paying off your mortgage early. But there are some really good reasons why I opted for a 15-year loan. Here's what they are, in case they might apply to you too.
One of the biggest downsides to a 15-year loan is that you'll have much higher monthly payments than with a 30-year loan. Since you're repaying your debt in half the time, you must send much more to the bank each month.
If you have a limited amount of income you can use to accomplish your financial goals, paying such a large mortgage payment could make it difficult to do other things such as investing for retirement.
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One reason I chose a 15-year loan, however, is that I'm not compromising on other objectives. Of course, I don't have unlimited income. But I chose to buy a house that was well below what I could afford so I'm able to make larger payments without affecting my ability to save for retirement, emergencies, or other important things.
The interest rate on a 15-year loan is well below the rate on a 30-year loan. Capturing that interest savings was worth it to me, even at the expense of having to pay more each month.
When I had a 30-year loan, I was paying extra to my mortgage anyway. Since I was going to be sending in larger payments no matter which loan I opted for, it just made sense to choose the 15-year loan with the lower rate. That way, more of my money goes to principal every month so I make progress faster on paying off what I owe.
My mortgages are my only debt. And being free of creditors is really important to me so I have more financial flexibility and fewer reasons to worry about being able to pay the bills. I'm willing to sacrifice extra fun money to make larger mortgage payments for the privilege of paying off my loan in half the time.
A 15-year mortgage loan definitely has some downsides, especially if you can't easily afford the payments. But there are good reasons why it may make sense for certain borrowers -- like me. The key is to make sure you've evaluated the total financial impact of your choice so you can get the mortgage loan that's best for your needs.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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