The 15-Year Mortgage- Pros and Cons
Higher Mortgage Payments, but Less Interest is Paid
May 31, 2009
U.S. consumers borrowing money to buy a house have traditionally sided with a 30-year mortgage. However, the 15-year mortgage has grown in popularity due to the fact that less interest is paid over the duration of the loan. Whilst mortgage payments are inevitably higher, homeowners are increasingly anxious to clear debt as quickly and efficiently as possible.
The Growing Popularity of the 15-Year Mortgage
- First American CoreLogic, a San Francisco real estate consulting company, produced statistics showing that the number of 15-year mortgages increased from 42,178 to 74,497 between January and February 2009.
- Bloomberg also reported that the cumulative value of 15-year mortgages more than doubled from $7.5 to $15.9 billion between February and March 2009.
Advantages of the 15-Year Mortgage
- Less interest is paid. As the 15-year mortgage at 4.375% has 180 less mortgage payments, those borrowing money pay a $194,000 less interest than those who opt for the 30-year mortgage.
- Loan cleared faster. A loan is cleared with only half the number of monthly mortgage payments.
- Avoid negative equity. The reduced term means that those borrowing money will now own a higher percentage of their property after each payment. This helps guard against negative equity when in the midst of a falling property market.
- Peace-of-mind. Paying less interest and clearing a mortgage early can provide real peace-of-mind, particularly in an unstable economic environment.
- Cheaper mortgage insurance. Homeowners are less likely to encounter health problems earlier in life which means that life and critical illness insurance are likely to be cheaper.
Disadvantages of the 15-Year Mortgage
- Higher mortgage payments. A $400,000 15-year mortgage at 4.375% would result in a mortgage payment of $3,034 per month. Whereas a 30-year mortgage at 4.625% would cost just $2,056 per month. That is $978 extra each month.
- Loan default. Those who can only just afford the mortgage payments should consider the 30-year mortgage. This will provide them with more scope in the event of an emergency and help prevent mortgage foreclosure. However, some lenders may be prepared to allow a borrower to switch product in the event of financial hardship.
- Higher returns from investing. It may be possible to benefit from a higher return by investing the money in equities instead.
- Less money for social activities. A higher mortgage payment means that there will be less money available each month for social activities and foreign holidays.
An increasing number of U.S. homeowners are now choosing the 15-year mortgage rather than the 30-year mortgage. Borrowing money is expensive and reducing the term of the loan means that less interest is paid. Mortgage payments will be a lot higher which means that a high disposable income is essential before signing-up to a new mortgage deal.
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Sources
Tedeschi, Bob. (May 22, 2009). "More takers for 15-year loans." The New York Times.
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