Still, the option is not for everyone. Anyone who is considering signing the papers for a 15-year mortgage should consider a number of alternatives and potential pitfalls.
First, let's look at the benefits.
A 15-year mortgage is typically a fixed-rate mortgage that fully amortizes - meaning it's fully paid off - after 15 years. Among the advantages:
- Less interest expense: You pay substantially less interest over the life of a 15-year loan than you do over the life of a 30-year loan, simply because you are racking up interest charges on the principal for a lesser number of years. Take a $200,000 mortgage as an example. On a 30-year loan with an interest rate of 6.3%, you could expect to pay a total of $245,660 in interest over the life of the loan. On the same $200,000 with a 15-year loan at 5.9% (15-year loans typically carry lower interest rates), you would pay only $101,847 over the life of the loan - less than half the total interest bill on the 30-year version.
- Fewer retirement worries: If a 15-year term allows you to retire your mortgage at about the same time you retire yourself, you won't have to worry about covering mortgage payments with your Social Security checks.
- Faster equity buildup: Since you are making bigger payments each month, you're paying down your loan and gaining greater ownership in your house at a much faster rate.
All of that can make a compelling case for opting for a 15-year mortgage rate, but in order to get those benefits, you will have to shell out more each month. On the same $200,000 loan we outlined above, the payments on a 30-year mortgage would amount to $1,238 a month, while the monthly payment on the 15-year loan would amount to $1,677 - a $439 difference.
If you can easily afford that, and if the thought of reaching mortgage-free nirvana is attractive to you, then great - a 15-year mortgage might be just the right thing for you. A few words of caution are in order, though, before you dive in.
Make sure you have a nest egg built up. You may be able to afford the higher payments on a 15-year mortgage today, but what if you and your spouse lose your jobs in a few years? Or, worse yet, what if you lose your ability to work? The equity in your house may do you little good - mortgage lenders generally want to see some income from you before they will lend you money on a house.
Refinancing into a lower-payment loan may also be tough, for the same reason. And selling the house might be close to impossible if the housing market is in a slump. Your best inoculation against such an event is to build a solid pot of savings that you can easily access (in other words, outside a typical retirement account) before you commit to making higher-than-normal mortgage payments. A six-month cushion to cover living expenses is generally considered to be adequate.
Make sure you are saving for retirement. Owning a house that's mortgage-free in your retirement years will do you little good if you have no money to cover other the other expenses of life, such as, say, food. As we have already noted, the banks aren't keen on lending mortgage money to people who have little or no incomes, so tapping home equity for retirement expenses likely won't constitute a particularly workable strategy unless you make sure you can generate some income in retirement as well.
The best way to do that is to save while you are working. So before you commit to spending several hundred dollars a month more on early-payoff mortgage payments, make sure that you are contributing an adequate amount to your retirement plans first.
Also, keep an eye on costs. Loan servicing and origination fees alone on our $200,000 loan could easily run to more than $2,000. That's an insignificant cost if you stick with your 15-year loan to its conclusion and rack up the big interest savings. But if at some point you find that you really can't handle the higher payments, it will cost you thousands more to refinance again into a lower-payment loan.
