The two most common types of mortgages are the 15-year and 30-year mortgages. While payments may be higher with a 15-year mortgage, it does allow for the home to be paid off faster. Whether someone is looking at a mortgage for a new home, an investment property, or to refinance their current home, opting for a 15-year mortgage may be the best option. Some of the benefits of choosing this over a 30-year mortgage include the following.
Pay Off the Mortgage Faster
A 15-year mortgage allows the homeowner to pay the mortgage in full a lot faster. This means they don’t have to worry as much about making mortgage payments once they retire if the goal for retirement is coming up. It also means those who use this type of mortgage for an investment property will start to see positive cash flow a lot faster. For those who are getting older, paying off the mortgage twice as fast means no worry about how the home will be paid off if they pass. Paying off the mortgage faster is the better option in almost all cases, as long as the payments aren’t too high to afford.
Reduced Interest Rates
Lenders offer different interest rates based on the length of the mortgage, among other factors. Most lenders are going to offer a lower interest rate for a 15-year mortgage, as they know it will be paid off faster and they’ll receive the interest payments more quickly. Over the life of the loan, this can lead to significant savings for the homeowner, as they won’t pay as much for interest as they would if they had a 30-year mortgage. Right now, interest rates are low, but lowering them further could prove to be beneficial.
Build Equity Faster
Equity is built as a home is paid off. As the homeowner pays the mortgage, they gain equity on the part of the home they own in full. If a home is halfway paid off, the homeowner has half of the home’s value in equity, assuming the value has not changed significantly since the purchase. When a homeowner opts for a 15-year loan, they’ll pay off the home faster, which means they’ll build equity faster.
If the homeowner decides, in the future, to get a home equity loan or line of credit for extra funds, they’ll have more equity to use for that purpose compared to someone who bought their home at the same time with a 30-year mortgage. Costly renovations can be more easily covered this way, and if any serious issues develop in the home, this makes it easier to get the funds needed to cover repairs.
Save Money in the Long Run
As mentioned, a 15-year mortgage can lead to significant savings over the year. Lenders will offer a lower interest rate and, since the mortgage is paid off in half the time, that means the interest will be paid in half the time. For a $250,000 home, the amount of savings in interest over the life of the mortgage could be as much as $90,000. The 15-year mortgage may have higher payments, but by paying the home off faster, there are fewer interest payments and, thus, thousands in savings in the long run.
Possible to Reduce the Monthly Payment When Refinancing
A 15-year mortgage can be obtained when someone is refinancing their home. Instead of continuing to pay on a 30-year mortgage, if the interest rates have lowered significantly since the home was initially purchased, it may be possible to reduce the monthly payments by switching to a 15-year loan. This does depend on a number of variables, such as the existing versus new interest rate, how long the homeowner has been paying off the home, and more. It is also possible for the mortgage payment to be approximately the same amount or a little higher, but it’s still possible to save on interest payments for the remainder of the mortgage.
For homeowners today, the idea of a 15-year mortgage is definitely appealing. While the downside is the monthly costs that can be higher, for many homeowners, this is well worth it compared to what they might pay with a 30-year loan. It’s possible to save on interest, pay the home off faster, build equity faster, and a lot more compared to what would be needed to fully pay off a 30-year mortgage. Talk to a lender today to see how much money could be saved on the purchase of your new home.