Skip to main content

The Pros and Cons of a 15-Year Mortgage

By U.S. News & World Report

Mortgage companies frequently pitch their 15-year mortgage ads online. And if you aren’t running into ads, if you buy a house, you’ll certainly be asked if you’d like a 15-year mortgage instead of the standard and conventional 30-year loan. All of which could make anyone wonder — is a 15-year mortgage a good idea?

It can be. It may also wind up being a decision that you rue from the moment you make your first payment to the day you and your belongings wind up on the street. Everyone’s financial situation is different. But if you’re mulling a 15-year mortgage, you’ve got plenty of pros and cons to consider.

[See: 10 Terms First-Time Homebuyers Should Know.]

Pro: Your mortgage is paid off far sooner, freeing up your cash. That’s an obvious pro, of course, and it’s why many people do it. You might easily save tens of thousands, or even hundreds of thousands of dollars, depending on how expensive the home, thanks to having a shorter time to pay off your loan.

“Over the life of the loan, you save about two-and-a-half times more in total interest with a 15-year mortgage versus a 30-year mortgage,” says Matt Culp, owner of Bainbridge Lending Group, on Bainbridge Island, Washington.

Pro: You’ll pay far less in interest. It isn’t just that you’ve shaved off 15 years’ worth of interest (though, yes, that’s a plus), but the rates are usually lower for a 15-year mortgage than a 30-year mortgage.

Typically, interest rates are 0.75 to 1 percent lower, says Casey Fleming, a San Francisco-based mortgage advisor and author of the book, “The Loan Guide: How to Get the Best Possible Mortgage.”

“The lower the interest rate, the faster the principal payoff even using the same time frame. So a 15-year mortgage yields a double bonus, so to speak,” Fleming says.

But if you’re thinking, “I am going to get a 15-year mortgage and become rich with savings,” well, not so fast. There are some drawbacks.

Con: The monthly payments for a 15-year mortgage are higher than a 30-year. For instance, if you took out a $200,000 mortgage at a 3.92 percent interest rate for 30 years, your monthly payments would be $946 (without factoring in taxes and other costs). If you took the same terms but paid off the mortgage in 15 years, you’d pay $1,471 a month. Now, granted, your interest rate would likely be lower, but even if your interest rate dropped to 2.92 percent, you’d still pay $1,373 a month.

Culp, who is a fan of 15-year mortgages and has one himself, also points out that the more expensive the home, the tougher it can be to handle the payments.

“On a given loan amount, the 15-year payment — principal and interest — is about 1.5 times the 30-year fixed payment,” Culp says. “Therefore, if the 30-year payment was $1,000 a month, it would be about $1,500 on the 15-year loan.”

He says that some owners may not feel that a $500 difference is that big of a reach, but the math really gets serious as the price of the home climbs. Culp offers up the example of a $3,000 monthly mortgage for a 30-year loan. The monthly payment would jump to $4,500 a month with a 15-year mortgage.

[See: 10 Ways Millennials Are Changing Homebuying.]

So it’s hard to argue with Fleming when he says: “Fifteen-year mortgages are not a good idea for folks with thin savings, or who carry credit card balances, or who have only one job in the family or who are on commission.”

“You know how it works in life — one year you are making really good money, and maybe you can pay the high payment on a 15-year mortgage no problem, but then all of the sudden, things change and you are making less. You don’t want to get stuck,” says Liliana Giraldo, a senior loan officer at Quontic Bank, headquartered in New York City.

For that reason, Giraldo says she would advise most people to stay far away from the 15-year mortgage and go with the conventional 30-year one.

Corey VanDenBerg, a lending officer at The Farmers State Bank in Brookston, Indiana, has similar thoughts. He says he has had several customers who have not only taken on a 15-year mortgage, but lived to tell the tale and felt that it was far superior to a 30-year mortgage. But (you knew a “but” was coming) VanDenBerg has also heard of foreclosures blamed on the 15-year mortgage having too high of a payment. He also has had customers come back and refinance to a 30-year mortgage to lower their payments.

Con: There’s a negative affect on your annual taxes. You like deducting the mortgage interest on your taxes every year, right?

“Because you pay less interest each year, that means you won’t be able to take as big of a tax deduction when you file your income taxes,” Culp says.

This is probably not enough of a negative to not do a 15-year mortgage if you’re otherwise excited, but it’s still something to consider.

[See: 7 Things First-Time Homebuyers Wish They’d Known.]

Con: You won’t free up that cash for 15 years. Sure, in the long run, you save a lot of money, and you’ll have no mortgage payment sooner and will have extra money to spend on whatever you want. But because of those high payments, you might have a tight cash flow for 15 years. For a decade and a half, you might find yourself struggling to put away money toward your retirement, your kids’ college fund or a rainy day fund.

Giraldo points out that if you’re really excited about the idea of having your mortgage paid off in 15 years, but are daunted by the idea of those higher monthly payments, you could take on a conventional 30-year mortgage — but make higher payments or extra payments that would still get your house paid off in 15 years.

Matt Hackett, operations manager of Equity Now, a direct mortgage lender in New York City, has similar advice — and solid logic.

As Hackett puts it, “If one opts for a 30-year mortgage, they have the option to make higher monthly payments. … Someone who opts for the 15-year doesn’t have the option to make a lower payment.”

More from U.S. News

10 Costs You Can Eliminate in Retirement

10 Ways to Repair Your Retirement Finances

9 Scary Things Consumers Do With Their Money

The Pros and Cons of a 15-Year Mortgage originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
Read Next Story

Related Stories

Frustration grows in Venezuela as earthquake death toll reaches 1,430

Israel and Lebanon sign framework agreement with US in ‘first step’ toward peace, Rubio says

Trump-endorsed populist poised to become Colombia’s next president as rival challenges vote