Why You May Not Want a 15-Year Mortgage Right Now -- Despite the Lower Rate

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  • You'll generally get a lower interest rate on a 15-year mortgage than with a longer-term loan.
  • Since home prices are up so much, the larger payment you get with a 15-year loan may not be affordable.

A shorter-term loan may not be your best option after all.

If you've been tracking mortgage rates at all, you may be aware that it's gotten exponentially more expensive to finance a home over the past few months. Throughout 2021, the average 30-year mortgage rate sat at under 4%. As of this writing, it's 5.358%. That makes a huge difference when it comes to borrowing for a home.

Because borrowing rates have jumped so much in a short amount of time, you may be thinking of signing a 15-year mortgage for the home you buy. Doing so will generally mean snagging a lower interest rate on your mortgage and reaping savings that way.

It's a good idea in theory -- especially if you don't like the idea of spending money on interest. But it may not work out for one big reason.

Can you swing a higher monthly payment?

The upside of taking out a 15-year mortgage is landing a lower borrowing rate on your home loan. The downside is getting stuck with higher payments on a monthly basis. And given that home prices are up on a national level, those higher monthly payments may be a big strain on your budget.

As of this writing, the average 15-year mortgage rate is 4.471%. Meanwhile, the National Association of Realtors reports that in March, median existing home sale price rose to $375,300. That's a 15% increase from the year prior.

Now, let's say you're buying a home that costs $375,000 and you can make a $75,000 down payment, which is 20% of that purchase price and the minimum you'd need to avoid private mortgage insurance. If you take out a 30-year mortgage at today's average rate, you'll have a monthly principal and interest payment of $1,676. If you take out a 15-year loan at today's average rate, your monthly principal and interest payment will be $2,291. That's a $615 difference.

Now it's definitely worth noting that if you go with a 15-year loan, you'll end up spending $190,789 less in interest in the course of paying off your home. That's clearly not a small amount of money.

But the question is whether you can swing an extra $615 a month on a mortgage payment at a time when living costs are up substantially across the board. If that $615 is a big stretch, then you may have to stick with a longer-term mortgage -- even if that means racking up more interest through the years.

Don't get in over your head

If you run the numbers and see you can afford the higher monthly payments that come with a 15-year mortgage, then it pays to sign a shorter-term loan, save that money on interest, and get your home paid off sooner. But if you can't afford the higher cost, don't push yourself. If you do, you might fall behind on your mortgage payments and put yourself at risk of losing your home. And that's not worth doing when you have the option to spread out your repayment period over an extra 15 years.

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