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.
Sign up for Kiplinger’s Free E-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
-
Will Utah Stop Taxing Social Security Benefits?Retirement Taxes Utah Gov. Spencer Cox wants to end the state's tax on Social Security income.
-
IRS Shakeup? What Trump's Commissioner Pick Could Mean for TaxesIRS An unconventional nominee comes amid broader efforts to reshape the IRS and tax policy in 2025.
-
What's Better Than Investing in Crypto? These 'Boring' PicksCryptocurrency may be good for a thrill, but older investors are better off with assets like bonds, guaranteed annuities, CDs and maybe dividend-paying stocks.
-
Four Actions to Lessen Retirement Stress for Women (and Men)Saving for retirement is anxiety-inducing for everyone, especially women. Following this four-part action plan can help improve your financial security.
-
Year-End Retirement Tax Planning Actions if You Have $1 Million or MoreConsider implementing these four strategies before December 31 to potentially improve your tax situation for this year and the future.
-
Five Simple Strategies to Ensure a Happy RetirementEmployer retirement plans are great, but individual responsibility plays a huge role in retirement success. Here's how to empower yourself.
-
25 Financial Moves to Consider Before December 31Tidying up your financial house before the New Year kicks off will put you in a great position to have a financially satisfying and successful 2025.
-
Five Side Hustles You Could Turn Into a Full-Time BusinessYou might be able to capitalize on your expertise in ways you haven't thought of, possibly even leading to quitting your 9-to-5 job to do what you love.
-
Stock Market Today: Nasdaq Nabs New High After Jobs DataThe S&P 500 also closed at its highest level ever, while the Dow Jones Industrial Average was pressured by another down day for UnitedHealth stock.
-
Rebound in Jobs Growth Keeps Fed on Track: What the Experts Are SayingJobs Report No nasty surprises in the November payrolls data leaves a quarter-point cut in play.
