Today, we’d like to tell you about an often overlooked mortgage option for home buyers – the 15 year loan. While the 30 year fixed rate loan is the most popular financing product, it isn’t necessarily the best option for everyone.
Loan: 15 Year Mortgage
Defining Characteristic: Loan period is half the length of the standard 30 year mortgage; higher payments allow owner to pay off the loan sooner
Good for: Financially stable borrowers who wants to pay off a loan sooner and can afford higher payments. Also good for creditworthy homeowners looking to refinance.
Not so good for: Those who want lower payments.
The growing popularity of the 15 year fixed rate home loan is due to a shift in homeowner psychology, experts say. Years ago, the idea was to take out the biggest loan possible and consider a home as part of an entire investment portfolio. Now, however, homeowners are eager to get rid of debt as soon as possible. Combine this attitude with historically low interest rates, and the 15 year mortgage looks like an attractive alternative to the conventional 30 year fixed rate loan.
This does not mean the 15 year loan is the best choice for everyone. Experts warn that most homeowners who take out a 15 year mortgage are older, more financially stable individuals who have savings and equity. First time buyers may not be suitable candidates for the 15 year home loan.
Because the 15 year mortgage is typically offered at a lower interest rate and requires higher monthly payments, more of your mortgage payment will go toward the principal balance of the loan – meaning your loan will get paid down a lot sooner.
Keep in mind that a lower interest rate will not mean a lower monthly payment, when it comes to a 15 year mortgage. For example if you have a 4.5% interest rate on a 30-year fixed-rate mortgage of $200,000, you would have a monthly payment of $1,015, including principal and interest. Despite a lower interest rate, the monthly payment will increase to about $1,480 on a 15-year fixed-rate loan with a 4% interest rate.
If you’re concerned about qualifying for a 15 year mortgage, or are unsure whether you can commit to higher payments every month, a good alternative would be to simply make extra payments on a traditional mortgage when you can. It’s important to make sure your mortgage terms do not penalize additional payments and you should also make sure your extra payments are going toward the principal. If you do this regularly, you could potentially shave off several years of your loan even without a shorter term mortgage.
When you’re just starting out in the home purchasing process, it’s important to educate yourself on all the options. Talk to your lender for more information and be sure to check back for our next intsallment of the Mortgage Profile Series.
Be sure to check out our mortgage education center to find more tips and information on the home buying process.
American Financial Resources is a direct mortgage mortgage lender who provides competitive mortgage rates and fixed rate mortgage options. Call today for a free rate quote and home loan consultation - 800-316-9508.
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