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
-
Stock Market Today: Have We Seen the Bottom for Stocks?Solid first-quarter earnings suggest fundamentals remain solid, and recent price action is encouraging too.
-
Is the GOP Secretly Planning to Raise Taxes on the Rich?Tax Reform As high-stakes tax reform talks resume on Capitol Hill, questions are swirling about what Republicans and President Trump will do.
-
Stock Market Today: Have We Seen the Bottom for Stocks?
Solid first-quarter earnings suggest fundamentals remain solid, and recent price action is encouraging too.
-
Social Security Is Taxable, But There Are WorkaroundsIf you're strategic about your retirement account withdrawals, you can potentially minimize the taxes you'll pay on your Social Security benefits.
-
Serious Medical Diagnosis? Four Financial Steps to TakeA serious medical diagnosis calls for updates of your financial, health care and estate plans as well as open conversations with those who'll fulfill your wishes.
-
What Wall Street's CEOs Are Saying About Trump's TariffsWe're in the thick of earnings season and corporate America has plenty to say about the Trump administration's trade policy.
-
To Stay on Track for Retirement, Consider Doing ThisWriting down your retirement and income plan in an investment policy statement can help you resist letting a bear market upend your retirement.
-
How to Make Changing Interest Rates Work for Your RetirementHigher (or lower) rates can be painful in some ways and helpful in others. The key is being prepared to take advantage of the situation.
-
5 Historic Philadelphia Homes for Sale NowPhiladelphia is a goldmine of historic properties that rival the best in New York, London and Paris for charm and opulence. Here are five gems you can own.
-
When to Sell Your StockKnowing when to sell a stock is a major decision investors must make. While there's no one correct answer, we look at some best practices here.
