Should You Take Out a 15-Year Mortgage Now That Rates Are Much Higher?

Shorter-term loans have their pros as well as their cons.

In mid-2020, mortgage rates plunged to historic lows, driving home buyers to scoop up properties at a rapid clip. That surge of demand sent home prices soaring, and they're still high to this day. But unfortunately, so are mortgage rates.

Mortgage rates stayed competitive from mid-2020 through the start of 2022. But over the past six months or so, mortgage rates have risen at a very sharp pace. And now, home buyers are facing dual challenges -- higher home prices and higher costs to finance a home purchase.

That said, there are steps you can take to save money in the course of getting a mortgage. For one thing, boosting your credit score could help you snag a lower mortgage interest rate. That's because a better score will help your mortgage lender see you as a less-risky borrower.

Another option to eke out mortgage savings is to sign on for a 15-year mortgage loan instead of a longer-term loan. Doing so will typically result in a lower interest rate than what you'll get with a 20- or 30-year loan.

But is taking out a 15-year loan a smart move right now? It all depends on your financial situation.

The pros and cons of a 15-year loan

With a 15-year mortgage, you'll commonly end up with a lower borrowing rate, and you'll also rack up less interest in the course of paying off your home due to that shortened time frame. That's the upside.

The downside, however, is that your monthly mortgage payments will be a lot higher with a 15-year loan. That's because you're paying off your home in half the time of a 30-year loan.

Getting a 15-year loan could be a good idea right now, because it will likely mean scoring a lower interest rate at a time when borrowing has gotten so expensive. But whether that makes sense for you will really depend on the monthly payments you can afford.

As a general rule, your housing costs, including your mortgage payment, property taxes, homeowners insurance, and homeowners association fees, if they apply, should not exceed 30% of your take-home pay. If you can make payments on a 15-year mortgage while sticking to that limit and not stressing yourself financially, then by all means, sign up for a shorter-term mortgage and reap the savings involved.

But if you can't easily swing those higher monthly payments, then do yourself a favor and stick to a longer-term loan. It's not worth it to get a 15-year mortgage that saves you on interest but puts you at risk of falling behind on your payments.

Make the right call

These days, taking out a 15-year loan can be tempting. But you'll need to be honest with yourself as to whether you can really afford those higher monthly payments. If not, get a 30-year loan and do your best to keep your credit score in great shape. That way, if mortgage rates drop over time, you may have the option to refinance to a new home loan with a much better rate than what you can get today.