It seems like a no-brainer. If you can qualify for a 15-year mortgage, not only will you own your house sooner but you’ll also save a fortune on interest. Try searching for “15-year vs. 30-year mortgage,” or something similar, and you’ll find dozens of articles telling you how much better it is to go for the shorter term option.
Why You Should Never Get A 15-Year Mortgage
So why am I saying you should NEVER get a 15-year mortgage?
Because, as both a serial homeowner and a property investor, I have plenty of experience with mortgages and homeowners. I’ve seen the myth of “Own your home sooner with a 15-Year mortgage” in action. It can result in homeowners actually losing their homes and finding themselves in significant financial difficulties for years, if not decades, afterward.
Here I’ll explain to you exactly why you should NEVER get a 15-year mortgage. In addition, I’ll share how you can enjoy some of the benefits of a 15-year mortgage and still pay off your mortgage in a decade and a half or less.
How A Mortgage Works & And Why A 15-Year Mortgage Seems Like A Good Idea
A mortgage is a specific type of loan. A bank or other lender gives you the money to buy a property, and in return, you pay them back with interest. What makes a mortgage different from other loans in that in order to secure the loan, you have to offer the property as collateral. You do this so that, if you are unable to make your repayments, the lender can force the sale of your home. The lender will then take the money you still owe from the amount the seller pays, leaving you with any remaining money.
When you apply for a mortgage, the lender will receive a quote. This quote tells you the interest rate for the loan and how much you will repay, in total, over the course of the loan. The total will be the “principal” which is the amount you borrow, plus the interest.
When you make your monthly payment, some of the money is taken off of the principal, and some of the money is a payment for interest. The lender only charges you interest on the amount of the principal you still owe.
This way of paying back a loan – with a fixed payment which goes towards the principal and the interest is called amortization.
Your monthly payments will depend on how much you borrow, for how long you borrow it and the interest rate the lender charges. For the purposes of this article, we are going to use fixed-rate mortgages as it makes it easier to compare different situations. The same principles apply to variable-rate mortgages.
The period over which you take out your loan will affect your monthly payment amount and the total interest you pay. Assuming all other things are equal:
- A 30-year mortgage will have the lowest monthly payment, but you will pay the most interest over the lifetime of the loan. In addition, because you are paying back the principal more slowly, the amount of equity you have in your home will also rise more slowly than with shorter loans.
- A 20-year mortgage allows you to be payment free and build equity in your home more quickly than with a 30-year mortgage. You will also pay less interest over the term of the loan. However, this is off-set by a higher monthly payment.
- A 15-year mortgage provides the quickest path to being mortgage-free and builds equity more quickly, as well as providing the lowest total amount of interest over the period of the loan. However, this term also has the highest monthly repayment.
Interest Rate Vs. APR – Annual Percentage Rate
You will see different interest rates for different mortgages, but the interest rate isn’t the whole story. When you are shopping for a mortgage, you also need to ask the lender about the APR’s for different loans. Your annual percentage rate is the amount charged over the year, including fees and other charges, divided by the amount you have borrowed. By including the origination fee, and any additional costs which are rolled into your mortgage, the ARP is a more accurate representation of how good a deal you are getting.
The Up-sides That 15-Year Mortgage Advocates Share
When fans of the 15-year mortgage speak about the loans, they usually push the upsides and hold-back on the downsides. In order to fully appreciate why you should never take out a 15-year mortgage, I’ll run you through the “pro’s” before hitting the “con’s.”
The Financial Savings Of A 15-Year Mortgage
It doesn’t take a rocket scientist to work out that by taking out a 15-year mortgage, you will pay less in interest. This is the primary motivation for most people who are considering a 15-year term loan rather than a longer-term loan.
For example, if you take out a $200,000 mortgage at 4% for 30 years, you will pay $143,700 in interest over the life of the loan.
On the other hand, if you borrow that same $200,000 at 4% but over 15 years, you will pay $66,300, a saving of $77,700 in interest.
Not only that but in reality, 15-year mortgages usually have a lower interest rate than their 30-year alternative, resulting in even higher savings than those noted above.
But What About The Tax Savings?
While you are counting up the money you will save on mortgage interest, you should also consider the tax code.
Well, because if you file a tax return, then you can claim your mortgage interest as a deduction. The exact amounts and rates vary depending on whether you file as an individual or as a married couple. However, it doesn’t matter if you have a 15-year or 30-year loan, on a mortgage of $300,000 you can deduct ALL of the interest paid each year, so those interest savings are looking a lot less important now, aren’t they?
The Speedy Pay-Off Of A 15-Year Mortgage
Another blindingly obvious plus point of a shorter mortgage is that you pay it off more quickly. As a consequence, the money you were using each month to make mortgage payments will now be available for other things.
15-year mortgage fans promote this as if it is something that would never occur to you.
“I’ll pay off a 15-year mortgage more quickly than a 30-year mortgage? Really? Well, it’s a good thing you’re here to share that with me because I wouldn’t have worked it out for myself.”
Being debt-free as soon as possible is a goal for almost everyone. I have yet to meet the person who needs the “shorter-term = quicker pay-off” explaining to them.
15-Year Mortgages Generally Have A Lower Interest Rate
Yes, you will, as a rule, find lower interest rates on a 15-year mortgage. However, the interest rate is only part of the picture. I have already mentioned how APR is more important than the interest rate. In addition, while this saves you money in interest in the long term, this is off-set by a higher monthly payment. Each and every month. For 15-years.
The Faster Equity Build With A 15-Year Mortgage
Yes, building the equity you hold in a home more quickly is a big positive of the 15-year mortgage but it also comes with a big but.
The “faster equity” advantage only really begins to gather steam after a few years. Not only that, but you need to consider why you might want more equity more quickly. There are really only two reasons why this might matter
- To take out a loan which is secured against your equity.
- If you know that you intend to sell your home relatively soon after you have taken a mortgage out and you would like more equity so you can use it as a deposit.
The Down-Sides That Are Glossed Over By The 15-Year Mortgage Advocates
The “plus points” of a fifteen-year mortgage aren’t really that big of a plus for most people. This lack of any real upside though is just a part of why I say you should NEVER get a 15-year mortgage.
Let’s go through them one by one.
The Size Of Home You Can Afford Will Be Affected
When a lender reviews your mortgage application, they will decide how much money they feel you can safely afford each month for your mortgage payment. The amount they decide you can afford depends on your current income levels and the amount of debt you already have.
The total amount of money you can borrow will be decided by looking at the monthly payment you can afford and working backward to see how much that comes to. As a result, the term of your mortgage will affect how much you can borrow and consequently, the home you can by.
For instance, imagine your lender decides that you can safely afford to make a maximum monthly mortgage repayment of $1,000 at an interest rate of 3.5%. The amount you could borrow, over different terms would be:
- 30-years: $203,710
- 25-years: $184,374
- 20-years: $160,937
- 15-years: $132,226
As you can see, there is a considerable difference between the amount you can borrow over 15-years and the amount you could borrow over 30-years. It is enough to significantly impact the home you would qualify to buy.
You Will Have Less Disposable Income
First and foremost, front and center for me is the fact that with a 15-year mortgage, you have more of your monthly income allocated to your mortgage payments. This puts an additional, unnecessary strain on your wallet each and every month.
If you have plenty of cash to spare, then this might not be important to you. On the other hand if like the majority of homebuyers, you are looking to balance mortgage payments with all of the other outgoings in your life then the lower payments of a 30-year mortgage are likely to work best for you.
It is not just your current situation; you should consider either. There are plenty of reasons why your income levels may take a sudden or temporary dip.
Reasons Why You May Suddenly Have Less Money To Go Around
Nobody sets out to buy a home, take on a mortgage, and then default on the payments. However, life happens. There are many reasons why you may find yourself unable to make one, or more, of your full monthly mortgage payments:
Your Employment Could Become Unstable
It doesn’t have to be a full-on redundancy to affect the stability of your employment. Sometimes previously secure full-time roles can become seasonal as a company looks for ways to cut back on costs. Alternatively, you could find your hours change from week to week or that you are forced to take on a job-share arrangement or look for work elsewhere.
Your Income Could Fluctuate
In the same vein as your actual job becoming less reliable, so to can your income. You might find that you are receiving less in commission or tips than you usually would, or perhaps your small business is suffering because you are sick and cannot work full-time.
This sort of deviation from your regular income level cannot be easily mitigated unless you have the savings to cover them, and the difference between a 15-year mortgage payment and a 30-year mortgage payment can be the difference between keeping your home or losing it.
You Or A Loved One Could Suffer An Accident Or Illness
Medical bills can easily mount up very quickly, and it isn’t just an issue of paying the bills. If you or a loved one are seriously ill, you may have to take time off work to look after them, travel for medical treatment, or pay for someone to look after your family while you cannot.
The last thing you need in this situation is the additional burden of a high mortgage repayment.
How You Can Still Grow Wealth With A 30-Year Mortgage
Taking on a 30-year mortgage instead of a 15-year mortgage doesn’t mean you can’t still be as well off as you are with a shorter-term loan. You simply have to be thoughtful and disciplined over what you do with your money.
The biggest thing is that you CAN pay off your mortgage in 15-years, even though you have a 30-year mortgage and I will show you how in a moment.
However, before then, I would like to share with you some of the other things you can do with the money you save on monthly mortgage payments by choosing a 30-year term over a 15-year term. This “difference” money can do wonders for your overall financial health.
You Can Pay Down Other Debts
In an ideal world, you would have paid down your credit cards, car loans, student loans, etc. before you applied for a mortgage. Realistically though, it is likely that you have outstanding debts or may incur new ones. This is where that “difference” money comes in.
Mortgages are generally the cheapest type of debt, with regards to interest rates and APRs’. Instead of taking the shorter term mortgage and juggling all of these debts, you can take the longer-term mortgage and use the “difference” money to pay them down more quickly.
Not only will you save money on the interest rates you are paying for your other debts, but by taking the 30-year mortgage, if you have a tight month financially, you can skip the extra debt payment and risk problems with your lenders.
There Are Things You Want To Save For
Irregular expenses such as holidays, vehicles, home renovations, etc. can sometimes be paid for through financing. Having said that just because you CAN do something doesn’t mean you SHOULD. Unless it is a genuine emergency, you should always try to save for an item instead of buying it with financing.
If you have a 30-year mortgage, you can save the “difference” money each month and make those purchases when you have the money in the bank.
Other Ways To Use Your “Difference” Money
- Build yourself an emergency fund. In an ideal world, you should have a full years living expenses saved. You may not be able to reach that, but any savings will help to off-set any of those temporary financial hiccups.
- Make additional regular payments to your 401(k)
- Set up an IRA
- If you have children, you can open a 529 Savings plan and start saving for their college education.
Once you have your other debts paid down and your savings padded, you’ll want to get on and begin to pay your mortgage off early.
How To Pay Off Your Mortgage In Less Than 30-Years Without Getting A 15-year Mortgage
Taking that “difference” money and using it to pay down the principal on your mortgage will not reduce your monthly mortgage payments. They will always stay the same. What it does do, however, is to reduce the term of your mortgage.
Now, one word of caution before we look at ways to pay your mortgage off early. Before making a payment, you should contact your mortgage company. Some companies charge an early repayment penalty while others only allow you to make additional payments at specific times. You also need to make it clear that you want the payment to go towards paying down the principal.
So, for example, take a $220,000 mortgage with a 4% interest rate over 30-years. For the sake of easy comparisons when I refer to a payment in this section, I mean a payment equal to your regular full monthly mortgage payment. I’ll also make these calculations working on the assumption that you make these extra payments EVERY quarter or EVERY two weeks etc. By doing this, I will be showing you the maximum possible savings, but you do not have to make all of the extra payments in order to make some savings.
Make One Extra Full Mortgage Payment Per Quarter
If you save the “difference” money and make one full extra payment each and every quarter, you will pay off your mortgage 11 years early and save $65,000.
Suddenly that 30-year mortgage has become a 19-year mortgage, and you have not placed yourself in additional financial stress to get there.
Make Bi-Weekly Payments
It is important to note that bi-weekly is not twice a month. If you make payments twice a month, you will make 24 payments a year. If you make bi-weekly payments, you will be making a payment every other week, and this is equal to 26 payments a year. This is an important distinction.
To make bi-weekly payments, divide your monthly payment by two. Now, pay this amount every other week. This will work out as the equivalent of one extra payment a year which will save you $24,000 in interest. It will also allow you to pay your mortgage off four years early.
Make An Additional Payment With Lump Sums
If you receive a bonus at work, a tax return, an inheritance, or any other more substantial one-off lump-sum pay it straight off of your mortgage principal.
Keep Your Disposable Income Steady
If you are awarded an increase in salary, you get a promotion, or you move onto another job that pays more, stop and take a look at your disposable income. Any time your income goes up faster than your outgoings, you will have a higher level of disposable income. Instead of absorbing this into your daily budget, add it to your regular monthly mortgage payments.
All Of The Usual Frugal Advice
This was very much a “Should I include it or shouldn’t I?” point because it is not specific to paying your mortgage off early. On the other hand, any advice which can reduce your outgoings has the potential to free up additional money to pay towards your mortgage.
As a compromise, I’ll simply say that general frugal living principals will help you save money, pay down your debts, make investments, and generally build your wealth.
You should NEVER get a 15-year mortgage. Despite the fact that many financial advisors will tell you that it is a great way to become debt-free in half the time you will with a 30-year mortgage.
There are many other ways to pay down your mortgage early, pay down other debts, and build your wealth without putting yourself under the additional strain of a larger monthly mortgage payment.
Instead, opt for a 30-year mortgage, pay off your other debts, max out your 401(k) and other tax-free savings, and then make additional mortgage payments. This technique will give you the best of both worlds. You’ll have lower monthly payments, less additional debts, more in savings, and you’ll have the security of having a lower monthly mortgage payment to cover.
Additional Resources From Real Estate Experts
Fixed Rate Mortgages by Eric Jeanette
Picking A Mortgage Loan Term by Bill Gassett
Millenial Real Estate Trends by John Cuningham
About The Author
Geoff Southworth is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership. Geoff is a real estate investor of 8 years has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.
This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policy.