15-Year Mortgages

With interest rates recently higher than they’ve been over most of the past 15 years, it’s not an appealing time to think about mortgages. But some expect interest rates to fall over the coming years, and many would-be homebuyers simply want or need to buy, regardless. If you’re in the market for a mortgage, do yourself a favor and at least consider getting a 15-year one instead of the traditional 30-year loan.

Why a 15-year mortgage? The main reason is that you’ll pay much less in interest over the life of the loan. Shorter loans also typically charge lower interest rates. For example, Wells Fargo recently listed an average annual percentage rate (APR) of about 6.6% for 30-year fixed-rate loans, but 6.0% for 15-year fixed-rate loans.

Here are the savings you might reap from a shorter-term loan, via a simplified example: Imagine that you’re buying a $400,000 home with a $320,000 loan. A 30-year fixed-rate loan would charge you monthly mortgage payments of $2,049 and a total of around $417,640 in interest paid. A 15-year fixed-rate loan would require monthly payments of about $2,700, with a total interest cost of about $166,060. Thus, while you’ll pay more each month, you’ll save more than $250,000 in interest, and you’ll be done with mortgage payments in half the time — perhaps enabling you to enter retirement mortgage-free!

A shorter-term loan will also allow you to build equity in your home faster, and if you end up needing to sell the home, you’ll be less likely to owe more than the home is worth.

All of that is wonderful, but don’t take on a 15-year mortgage unless you’re confident that you’ll be able to pay the higher monthly payment. Buying a less-costly home can help with that. You might alternatively strike an effective compromise by getting a 30-year mortgage and then making several extra payments per year. Doing so can shave many years off the life of your loan, saving you a lot in interest payments.