3 Questions to Ask Yourself Before Getting a 15-Year Mortgage

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A 15-year mortgage comes with higher monthly payments. Here’s what to consider before springing for a shorter mortgage term. 

When you buy a house, you have to decide what kind of mortgage you want. For most people, the only two choices it makes sense to consider are a 15-year fixed-rate loan or a 30-year fixed-rate loan. With both types of mortgages, your rate and monthly payment can’t change over time so you have the certainty you need to ensure your home is affordable.

But which of these two options is right for you? If you’re thinking about taking out a 15-year mortgage, there are three questions you should ask yourself first.

1. How much more will the monthly payments be?

A 15-year mortgage comes with much higher monthly payments, despite the fact that this type of loan usually has a lower rate than a 30-year mortgage. The reason for the higher monthly payments is obvious: You’re paying off your debt in half the time.

You need to make sure you know just how much higher your payments will be, though. Here’s an example to help you see the difference:

Your interest savings is substantial. But you would be committing an extra $179.68 per month every month to your payment. That’s a lot of extra cash that you won’t have available for other things.

2. Will you be house poor if you opt for a 15-year mortgage?

The next question you need to ask yourself is whether you would end up house poor if you opted for a 15-year loan instead of a 30-year loan.

You want to try to keep total housing costs to around 25% of your take-home pay or less in order to avoid being house poor. This means you should have plenty of money left to do things like save for retirement, rather than send all your extra funds to your mortgage lender.

You also need to remember that if you choose a 30-year loan, you can always opt to pay off your mortgage early by making extra payments if you want to. But if you opt for a 15-year loan, you’re stuck with those high payments unless you refinance.

If you lose your job, the extra per month could become a huge burden. Or if you want to switch to a different career with a lower salary, cut back your hours, or just devote money to other goals, you won’t have the option to do that if you’ve made a commitment to pay a ton of money to your lender each month.

You should take the time to seriously think about whether it makes sense for you to commit to a substantially higher mortgage payment that could leave you struggling, rather than to opt for a 30-year loan and just pay more when you can.

3. What is the opportunity cost of opting for a 15-year versus a 30-year loan?

Finally, you need to think about the opportunity cost of choosing a 15-year loan versus a 30-year loan. The money you’re putting toward your mortgage earns a return equal to the saved interest. But you can often invest and earn higher returns. If you can put your extra monthly money into an investment earning 10%, instead of earning an 8% annual return or less by paying off your mortgage early, you’re usually better off doing that.

Ultimately, you need to think about whether you’re willing to give up the freedom, flexibility, and affordable monthly payments of a 30-year loan to get the interest savings that comes with a 15-year mortgage. For many people, this move simply doesn’t make sense and a 30-year loan is a better option.

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