When shopping for a new home, it's wise to invest as much time in exploring mortgage options as you do in finding the right property. A 15-year mortgage, which is often overlooked by first-time buyers, can significantly impact your long-term financial outcomes and nest egg.
Personal finance typically evolves from a lower income in your 20s to higher earnings later in your career. In your 20s, saving can seem impossible due to responsibilities like marriage, children or student loans. This challenge often continues into your 30s and 40s with new expenses such as college tuition or elder care. Many people experience a wake-up call around age 50, realizing they should have started saving earlier.
One way young homebuyers can break this cycle is by choosing a 15-year mortgage over a 30-year term. Though monthly payments are higher, this option accelerates loan repayment and results in significant long-term savings. A 15-year mortgage can set you on the path to financial independence at a younger age while also freeing up funds for reinvestment in assets like stocks, bonds or additional real estate.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Here are some pros and cons of a 15-year mortgage to consider:
Advantages:
- Long-term savings
- Faster accumulation of home equity
- Mortgage-free 15 years sooner
Disadvantages:
- Larger monthly payments
- Potentially tougher qualification requirements
- Less flexibility for other goals
When determining how much mortgage payment you can afford, consider the 28/36 rule. This guideline suggests spending no more than 28% of your gross monthly income on home-related costs and no more than 36% on total debts, including mortgage, credit cards and other loans. For example, if you earn $5,500 a month and have $500 in existing debt payments, your monthly mortgage payment should not exceed $1,480.
Additionally, be prepared for emergencies by keeping three months' worth of payments — including your mortgage and other debts — in reserve.
What to know about a 15-year fixed-rate mortgage
Typically, 15-year fixed-rate mortgages offer lower interest rates than 30-year loans. To illustrate potential lifetime savings, consider this hypothetical comparison from Rocket Mortgage: On a $300,000 home with a 20% down payment ($60,000) and a 6% interest rate (the same for both loans), the monthly payment for a 30-year mortgage is $1,439, while a 15-year mortgage costs $2,025. Despite the $500 higher monthly payment, a 15-year mortgage saves over $153,000 in total loan costs and eliminates mortgage debt 15 years sooner.
Most homebuyers can qualify for a 15-year mortgage, depending on their financial situation and lender criteria. Those with stable income and a solid financial foundation are more likely to secure this loan.
Opting for a 15-year mortgage can be a strategic choice for those who can manage the higher payments and seek substantial long-term financial benefits. Evaluate your financial situation carefully and consult a mortgage expert to determine if this option aligns with your goals.
Related Content
- Five Tips for Nabbing Your Dream Home in a Tough Market
- The 10 Best Cities for New Home Seekers
- 13 Tax Breaks for Homeowners and Home Buyers
- Should You Pay Cash When You Downsize? Here Are Three Scenarios
- Five Big Steps to Buying Your First Home
-
Risk Is Off Again, Dow Falls 397 Points: Stock Market TodayMarket participants are weighing still-solid earnings against both expectations and an increasingly opaque economic picture.
-
I Inherited $50,000, and My Retirement is Already Fully Funded. Where's the Best Place to Store It for Maximum Growth?These savings solutions can help you maximize returns without the risk.
-
Risk Is Off Again, Dow Falls 397 Points: Stock Market Today
Market participants are weighing still-solid earnings against both expectations and an increasingly opaque economic picture.
-
A Broad Approach to Innovative Trends Helps This SPDR ETF OutperformThe SPDR S&P Kensho New Economies Composite's bets on transformational technologies have sparked volatility – and big gains – this year.
-
The Best Invesco ETFs to BuyInvesco's expansive and diverse ETF lineup includes multiple notable candidates for serious investors. Here are the best Invesco ETFs to buy.
-
Parents and Caregivers: Don't Miss Your Roth Conversion WindowCaring for a child or parent can mean a drop in income and a lower tax bracket. Why not take advantage by moving money into a Roth account? Here's how it works.
-
Testing the Retirement Waters in Florida? A Partial Plunge May Negate Tax BreaksMost folks know Florida is a tax-friendly state, but they might not know that part-time residents may not qualify, as our cautionary tale shows.
-
Catch-Up Contributions for Higher Earners in 457(b) Plans: What You Need to KnowGovernment 457(b) plans are about to get more complex as new Roth catch-up requirements come into force. Here's how to prepare for the changes.
-
Stocks Rally as Investors Buy the Dip: Stock Market TodayMost sectors are "go" only a day after talk of bubbles, extended valuations and narrow breadth undermined any kind of exuberance.
-
Elon Musk's $1 Trillion Pay Package Passes: What's at Stake for Tesla StockMore than 75% of Tesla shareholders voted to approve a massive pay package for CEO Elon Musk. Here's what it means for the Mag 7 stock.
