This One Choice Can Add Hundreds to Your Mortgage Payment -- but It Can Sometimes Be a Good Move

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KEY POINTS

  • A 15-year mortgage is much more expensive each month than a 30-year loan.
  • There are some benefits to a 15-year mortgage.
  • You'll need to consider your personal situation to decide what's right for you.


Should you consider a 15-year mortgage over a 30-year loan? 

When you get a home loan, you are going to have to make some important choices. One of those decisions could end up making your loan cost hundreds of dollars more per month. But in some cases, it's the right decision. 

So, when should you opt for a loan that has higher monthly payments? Here's what you need to know. 

Picking this type of mortgage could make your loan payment substantially higher

The decision that would make your mortgage payments cost much more each month is to take a 15-year loan instead of a 30-year loan.

A 15-year mortgage has a much lower interest rate than a 30-year loan and it can cost you a lot less over time. But, since you have half the time to repay your home loan in full, monthly payments are substantially larger. 

For example, say you were borrowing $200,000 and trying to decide between a 15-year and 30-year loan. Based on prevailing interest rates as of June 26, 2022, a 15-year loan would probably come at a rate of around 5%, while a 30-year mortgage could have a rate around 5.90%. 

The monthly payments on your 30-year mortgage in this scenario would be around $1,186, while the monthly payments on a 15-year loan would be around $1,582. Even though you'd pay a far lower rate, you would get stuck paying around $396 more per month. That's a substantial amount of money.  

Over time, though, the 15-year loan would cost you $84,686 in interest costs, while the 30-year would come at a cost of $199,238.00. So you would be paying a lot more money every month but you'd pay it for a lot less time and would save yourself quite a bit of money in the end.  

When is a 15-year loan a good choice?

In general, a 15-year mortgage is not the best loan for most people -- despite the fact that some experts such as Dave Ramsey recommend it.

Since a 15-year loan is so much more expensive, you'll be tying up a lot of your money that you cannot invest in assets that produce a higher rate of return. You'll also increase your risk of foreclosure by committing to larger payments, and will leave yourself with much less flexibility in your budget.

But if you have plenty of money to invest in other things, aren't worried about higher monthly bills, and becoming debt-free ASAP is really important to you, then a 15-year loan could be a good option. Since choosing this kind of mortgage would allow you to pay a lower interest rate and thus make your payoff process cheaper, you could end up much happier in the end. 

Just remember to consider the serious downsides of a loan with a shorter payoff period, and be sure this is really the best decision. If it is, then accepting a loan with a higher monthly payment could be the best choice in the end.

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