Should You Take Out a 15-Year Mortgage? Here's What Suze Orman Thinks
- A 15-year mortgage could save you a lot of money on interest.
- If you can swing a higher monthly payment, it's worth signing up for this loan product.
The financial expert has some solid advice for home buyers.
Most people can't afford to plunk down a giant pile of cash for a home -- especially not at today's prices. That's why mortgage loans exist.
But when it comes to signing a mortgage, you have choices. You can sign a 30-year mortgage, which is what most borrowers end up doing. Or, you can sign a shorter-term loan, like a 15-year mortgage.
Financial expert Suze Orman says that over 90% of home buyers end up going with a 30-year mortgage. But she wishes more people would consider a 15-year mortgage instead.
The reason so many buyers choose a 30-year mortgage is simple. These loans can be the most affordable since payments are spread out over a longer period of time. But Orman insists that home buyers are missing out on a big opportunity to save money by opting for a 30-year mortgage.
As she says on her blog, "There’s nothing wrong with going the conventional route and spreading your payments over 30 years. But I wish more people would take out a 15-year mortgage instead."
Getting a 15-year mortgage could mean saving a lot of money on interest. First of all, with a 15-year loan, you'll generally be looking at a lower interest rate on your mortgage. That's because lenders will generally cut you a break on interest in exchange for getting repaid sooner.
But also, because of your shorter repayment period, you'll accrue less interest on your loan. Plus, with a 15-year loan, you get to be mortgage-free sooner.
So, imagine you're taking out a $200,000 mortgage. If you sign a 30-year mortgage today, you might get stuck paying 5% interest. That would leave you spending $186,689 on interest over the life of your loan.
On the other hand, if you take out a 15-year mortgage for the same amount, you might snag a 4% interest rate. Between that and your shorter repayment period, you could end up spending just $66,216 on interest in the course of repaying your home. That's a ton of savings.
Can you swing a 15-year mortgage?
The one drawback of getting a 15-year mortgage is that your monthly payments will be higher. And to keep up with higher payments, you may need to sacrifice in other areas. That could mean not taking big summer vacations or having less money to spend on leisure activities during the year. It could even mean having to sacrifice on things like transportation -- say, driving a beat-up, older car rather than springing for a newer one.
These aren't small sacrifices, so it's important to use a mortgage calculator to run some numbers and see what mortgage payment you can work into your budget. It's not worth signing a 15-year mortgage if doing so will cause you to fall behind on your housing payments or other bills, or if it will make it so you have to cut back on non-essentials to the point where you're miserable.
But if you can afford the higher monthly payments that come with a 15-year mortgage, it's worth considering one. Doing so could save you a lot of money and leave you debt free much sooner.
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