The shorter term makes a 15-year loan a great option for those looking to pay off their mortgage quickly and are comfortable taking on a higher monthly payment.
Benefits of 15-Year Fixed-Rate
- Pay off mortgage faster and pay less interest over the life of the loan
- Lower interest rates than 30 year loans
- Certainty of Monthly Payment
- Build Equity Faster
- Minimum 3% down payment for low-balance loan amounts
- Minimum 5% down payment for high-balance loan amounts
- Minimum credit score of 620
- Loan amount must be within the property’s county conforming loan limits
What is a 15-year fixed-rate mortgage?
A 15-year fixed-rate mortgage is a home loan that is structured to provide an unchanging interest rate for a shortened period compared to the traditional 30-year fixed-rate option.
Opting for this loan structure means the rate will not change for the life of the loan, something that can be appealing to renters who face annual rent hikes as inflation and cost-of-living increases.
A 15-year fixed-rate loan is intended for anyone wishing to take advantage of the lowest rates while also enjoying the perks of a fixed monthly payment. With a 15-year loan, homebuyers may give up some of the purchasing power that the lower monthly payment of a 30-year fixed-rate loan offers, but it does put clients on the fast track to owning a home free and clear. The 15-year fixed loan is an alternative option to traditional financing options, including conventional, FHA, VA, and jumbo financing.
What are interest rates for a 15-year fixed-rate mortgage?
15-year fixed-rate loans on average are about 0.5% – 1% lower than 30-year fixed-rate alternatives. This can be appealing to clients who don’t necessarily need to finance a home but prefer to take advantage of the leverage a mortgage provides instead of all-cash offers.
Is a 15-year fixed-rate loan worth the interest savings?
With a shorter loan period, buyers pay less in overall interest over the life of the loan compared to the 30-year fixed-rate option. However, savvy clients who invest the savings from their 30-year loans back into the market earn a conservative 5% annually, giving them a higher net worth than those who pursue the 15-year option.
In 15 years, the shorter loan will be paid off, but the total balance of an investment account gaining 5% interest for 15 years will exceed the remaining balance on the 30-year fixed-rate loan. This is the main reason we will often advise opting for a 30-year loan given the market returns will almost always lead to a better outcome for our clients.
Pros of a 15-Year Fixed-Rate Loan
Build Home Equity Faster
Buyers who use the 15-year fixed-rate loan accumulate equity in their home much faster than 30-year fixed-rate loan borrowers, mainly because the loan amortizes over half the time. This equity may become valuable in the future when you wish to draw funds from your home for renovations, upgrades, or expansions. With the lower interest rate and shorter repayment term, the 15-year fixed-rate mortgage sets you up to pay the loan off faster than any other option.
Lower Overall Interest Paid
Paying less in interest is the main perk of a 15-year loan, so let’s run the hypothetical numbers to see the difference in interest paid over the course of the loan. Imagine you are taking out a $500,000 loan with a 4.5% fixed interest rate for 15 years. This means a $188,493 payout of interest over the life of the loan. If we look at how a 30-year fixed loan compares, we can see much more in interest is paid.
Using an average of the last 5 years, the interest rate spread on a 15-year fixed-rate loan is about 0.65% lower than the 30-year fixed-rate counterpart. With a 5.125% rate for the 30-year fixed-rate loan, you would end up paying $412,032 in interest. That leaves you paying $223,539 more in total interest with the longer loan term. These savings can be better utilized in other areas of your life, such as retirement savings, education or medical needs, or home improvement goals.
Want to see how much you could save in interest by choosing a 15-year fixed-rate loan? Use the JVM Amortization Calculator.
Faster Route to Free and Clear Ownership
Owning a home may feel like it simply provides one of your basic needs. However, homeownership is one of the most popular forms of investing in the U.S. and is often understated as a way to build wealth that can be passed on to future generations. Paying off your loan in the shortest amount of time will be the quickest way to maximize this equity growth and remove one of the most significant debts from your financial profile.
Cons of a 15-Year Fixed-Rate Loan
15-year mortgages come with their fair share of benefits, but there are many reasons why this loan is not the default choice for many homebuyers.
Higher Monthly Payments
Buyers will often opt against a 15-year loan because the shorter loan term puts a heavier strain on their budget. With the loan repayment period cut in half from a traditional 30-year loan, the monthly payment is significantly higher than the 30-year loan. For many, a home purchase is the single biggest purchase they will make in their life, and for some, that cost burden is best spread out over the longest possible period. Many buyers interested in 15-year fixed-rate loans have the funds to buy a home in all cash or have a substantial down payment if needed, so the shorter loan period is a luxury choice for the lowest interest rate.
Lower Purchasing Power
Higher monthly payments limit purchasing power. You qualify for higher purchase prices with longer loan terms, since the monthly payments are a lower percentage of your earnings. For buyers looking to maximize their purchasing power, we often recommend the 30-year term. Extending your loan term from 15 to 30 years can lower your monthly payment by thousands of dollars which can translate to hundreds of thousands of dollars in purchasing power.
Interest Savings Outpaced by Stock Market Returns
Tying up more of your disposable income in your home lessens your overall investment flexibility. While real estate is an excellent investment, one of the main appeals of this investment type is the low cost of capital and high rate of returns. By opting for a shorter loan period, you are willingly paying more each month to pay off your loan quicker. This extra monthly payment could be better used investing in stocks that return a much higher annual rate of return than the < 1% interest rate you save on your loan.
When is the best time to consider a 15-year fixed-rate mortgage?
Taking advantage of the fixed monthly payment and lower total interest paid over the life of the loan is an appealing option to buyers who are not worried about paying the higher monthly payment each month.
When interest rates drop, astute borrowers will be quick to lock in the lowest fixed rate possible. This way, when market volatility hits and rates rise, the 15-year payment structure protects their minimum monthly payment and offers the most savings long-term.
If you are halfway through paying off your 30-year mortgage, you can opt to refinance into a 15-year fixed-rate loan to take advantage of a lower interest rate and still end up paying your loan off in the same amount of time. However, the interest rate improvement must be significant enough (typically at least 0.5% or more) in order to offset the large amount of interest that is paid off in the first 15 years of a 30-year loan.
We recommend evaluating this with one of JVM’s experienced refinance specialists to weigh the pros and cons for your exact situation.
Mortgage Insurance – What is it and when is it required?
Mortgage insurance is a mandatory addition to more lenient financing options that acts as an added protection for your lender in the event of a default. By requiring this additional payment, lenders allow buyers to purchase homes with far less than the 20% down that was needed in the early days of homebuying. Although mortgage insurance may seem like an additional burden to many buyers, the addition of mortgage insurance to loans has increased home accessibility to millions who cannot afford to save for a 20% down payment to buy a home.
Government loans, such as FHA financing, have mandatory mortgage insurance that is required for the life of the loan and cannot be removed. This is composed of an upfront mortgage insurance premium as well as a monthly mortgage insurance premium. VA loans don’t have mortgage insurance but do include an upfront funding fee that is similar to the FHA upfront mortgage insurance premium.
Mortgage insurance tends to be slightly cheaper for 15-year fixed-rate loans compared to 30-year fixed-rate loans, since the shorter loan term entails less risk of default and quick accumulation of equity.
Private Mortgage Insurance (PMI)
Private mortgage insurance is required for all conventional loans with a down payment of less than 20%. Borrowers can opt to pay this monthly (most popular), in a lump sum at closing, or finance the lump sum into the loan. The cost for PMI varies depending on credit score, down payment, and loan term.
Once a homebuyer accrues 20% equity in their home, they can petition to have this monthly payment removed from their loan, often by ordering an appraisal to confirm the value of their home. Otherwise, mortgage insurance is automatically removed once you accrue 22% equity in your home.
Jumbo loans with less than the standard 20% down will also have mortgage insurance on the loan, although this is typically paid for by the lender and passed on to the buyer in the form of a higher interest rate.
Down Payment Options for a 15-Year Fixed-Rate Mortgage
With a 15-year fixed-rate loan, buyers can still take advantage of the most lenient minimum down payment requirements for each financing type listed below:
- 3% minimum for low balance loans (loan amounts below the 2022 limit of $647,200)
- 5% minimum for high balance loans (loan amounts in high-cost counties above $647,200 and below $970,800)
- FHA: 3.5% minimum
- VA: 0% minimum
- Jumbo: 10% minimum – 20% for best price options
Is a 15-year fixed-rate mortgage right for you?
There is no one-size-fits-all for mortgage financing. The best way to determine whether a 15-year fixed-rate mortgage makes the most sense for you is to talk to one of our mortgage experts at JVM Lending. Our experts can walk you through monthly payment scenarios, give you current interest rates, and discuss any other questions or concerns you might have.
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