Is a 15-Year Fixed Rate Mortgage Right for You?

 Is a 15-Year Fixed Rate Mortgage Right for You?

Bottom Line

15-Year fixed rate loans are great for borrowers who:

  • Have a stable job and income
  • Already have saved a nest egg for emergencies
  • Can comfortably make the higher monthly payments
  • Want to eliminate their mortgage debt faster

With interest rates at historic lows, many homeowners or buyers may be tempted to choose a 15-year fixed rate mortgage over the more typical 30-year mortgage. The 15-year enables you to pay off your loan faster and likely lock in a lower interest rate, but will come with higher payments. To make a smart decision, you need to determine what's most important to you: financial flexibility or paying off your mortgage faster.

Low Interest Rates Offer Your More Options to Consider

Mortgage rates are at or near the lowest they have been in our lifetimes. Today, rates for 30-year fixed rate mortgages are below 4% and even lower for 15-year loans. These rates determine how much you will have to pay in interest over the life of the loan. And it can be significant!

For example, on a loan of $200,000, a difference between a mortgage rate of 3% and 4% means a difference in monthly payment of roughly $843 to $954 or $111. That may not seem like a big difference, but over the course of the 30-year home loan, you'll pay back approximately an extra $40,000. That's a lot of retirement money!

There's even more opportunity for you to save with a 15-year mortgage. These shorter loans accumulate less interest and often come with lower interest rates. For example, for a $200,000 loan at Freddie Mac's posted rate of 2.89 percent, monthly payments on a 15-year fixed rate mortgage would be $1,370.91 (not including property taxes and homeowner insurance). By contrast, the payment on a 30-year fixed-rate mortgage at the current Freddie Mac average rate of 3.62 would be $911.52.

If you can swing the large monthly payment, you'd save roughly $80,000 on interest over the life of the loan and make 180 fewer monthly payments.

Savings, Spending Money and Your Monthly Mortgage Payment

Total debt to repay isn't the whole story of course. While today's low rates make the monthly payments on a 15-year fixed rate refinance lower than ever before, the payments are higher than with a 30-year loan because you are paying off the loan in half the time.

The resulting difference between the 15- and 30-year mortgage above amounts to $460 a month – that's significant cash flow for most households. If you have a stable job and lifestyle as well as savings to comfortably make the higher payments over the life of the loan, than the shorter loan might be a good fit for you.

However, many experts advise against investing the bulk of one's savings into a home because it can limit your financial flexibility to in the event of an unforeseen personal financial crisis, such as losing a job or falling ill.

Have Your Cake and Eat It Too!

There are also ways you can pay off your loan faster AND keep your financial flexibility. One popular method is to use make extra payments on your mortgage. For example, with most mortgages, borrowers can make extra payments to pay down the principal faster while retaining flexibility to handle any unforeseen financial burdens.

This enables you to keep the lower monthly payments and higher cash flow of the 30-year mortgage but let's you reduce the amount you owe and pay off your loan faster.

Should I Refinance My 30-year Mortgage to a 15-year?

If you are already in a 30-year mortgage, you may have the chance to refinance to a lower interest rate. Today's low interest rates offer you the option of further reducing your monthly payment by sticking with a 30-year loan OR shaving years off you mortgage by refinancing to a 15-year. Depending on the interest rate on your current mortgage, you might be able to refinance to a 15-year loan and keep the same monthly payment.

Before talking to a mortgage lender, use online tools such as this Fannie Mae Refinance Calculator to help you evaluate the decision.