Here’s Why It Pays to Sign a 15-Year Mortgage Today

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

A shorter-term loan might be expensive. But if you can swing, it could pay to sign up. 

There’s a reason so many would-be buyers are discouraged from entering the housing market today. Mortgage lenders are charging exorbitant rates for those looking to finance a home. And even if you can afford a mortgage, you may be turned off by the notion of having to pay almost 8% interest on a home loan — especially when, just a few years ago, it was possible to sign a mortgage at 3%.

But there is a step you can take to snag a lower mortgage rate today, and it’s taking on a shorter-term loan. A 15-year mortgage is less risky in the eyes of a mortgage lender than a 30-year loan, because it’s being paid off sooner. You’ll generally be eligible for a lower interest rate on a 15-year loan than a loan whose term is twice as long.

Right now, the average 30-year mortgage rate is 7.76%, according to Freddie Mac. For a 15-year loan, the average rate is 7.03%. That’s a notable difference. So if you’re able to swing the higher monthly payments that come with a 15-year loan, you may want to go for it.

You can’t just bank on refinancing

Some people might say that signing a 15-year loan to save money on interest isn’t necessary because in a few years, mortgage rates are apt to come down. And from there, you can just refinance your mortgage into a lower rate.

But that strategy hinges on the assumption that rates are going to move downward, not upward. We can’t say for sure that will happen.

And if rates do fall, that may not happen for years. So you may decide that instead of signing a 30-year mortgage at a higher rate, you’ll sign a 15-year loan at a lower rate and know that you’re reaping some savings on interest.

Also, even if borrowing rates do come down, you’re not guaranteed to be able to refinance. What if your credit takes a massive hit at the time that rates fall? There may be more attractive rates out there, but if you can’t snag a better deal, you’ll be stuck with your original interest rate.

How much can you save with a 15-year mortgage?

Many people won’t be able to afford the higher monthly payments that come with a 15-year loan. But if you can swing them, then you stand to save a bundle.

Let’s assume you’re buying a $250,000 home and are putting 20%, or $50,000, down. If you take out a 30-year loan at 7.76%, you’ll be looking at monthly payments of $1,758. You’ll also be looking at paying a total of $387,730 in interest over the life of your loan if you never manage to refinance.

Now let’s look at a 15-year loan for that same amount at 7.03%. You’ll be looking at monthly payments of $2,308. But you’ll spend a total of $170,456 on interest in the course of paying off your home. So if you’re able to swing an extra $550 a month, you stand to save over $217,000 in interest all in.

Today’s mortgage rates are expensive across the board, no matter your loan term. But if you sign a 15-year loan instead of a 30-year mortgage, you might at least get a bit of a break.

Our picks for the best credit cards

Our experts vetted the most popular offers to land on the select picks that are worthy of a spot in your wallet. These best-in-class cards pack in rich perks, such as big sign-up bonuses, long 0% intro APR offers, and robust rewards. Get started today with our recommended credit cards.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More