As many as 30% of homeowners have recently decided to opt for a 15-year mortgage instead of a 30-year, according to The Motley Fool. If you’ve been considering it, read on to discover if you might be a good candidate.
Benefits of a 15-year mortgage
1. Enjoy more financial freedom by paying off your home in half the time
After having to pay rent and mortgage for what probably seems like forever, you’d be able to eliminate this expense from your monthly budget 15 years ahead of schedule and build equity at a much quicker rate.
2. Today’s low-interest rates
Currently, we’re experiencing lower mortgage rates, according to Bankrate. This makes a 15-year mortgage more affordable.
“Fifteen-year mortgages represent a somewhat lower risk to lenders, so their interest rates tend to be lower. For example … a borrower with a 720 FICO score (good credit) can expect a 30-year mortgage APR of 4.10%. On the other hand, the same borrower could qualify for an APR of 3.40%,” according to The Motley Fool.
3. Save on interest over the long-term
With a shorter mortgage term, you reduce how much you pay each month in interest. Plus, when comparing how much you’d pay in interest over a 30-year loan to a 15-year loan, you could potentially save tens of thousands of dollars in interest over the long-term, according to NerdWallet.
4. Spend more on your health
At Transamerica, we believe wealth and health go hand in hand. With no mortgage expense, you could use that extra cash on a membership to that premium gym you’ve always wanted to belong to, a Peloton indoor exercise bike if you prefer working out at home, regular appointments for muscle massages at your local spa, or Door to Door Organics to ensure you always have an abundance of fresh, healthy food and snacks. Speaking of healthy snacks, if you’re still living life in the fast lane while you prepare for retirement, read our “Healthier Snacks on the Go” article for some ideas on how to satisfy your hunger while maintaining a busy lifestyle.
Who’s a good candidate for a 15-year mortgage?
1. People who can afford it.
Obviously, a shorter mortgage means a higher monthly payment. However, if you have a higher salary, perhaps you can afford a higher monthly payment now to reap the financial benefits later.
As a general rule of thumb, mortgage payments should be no more than 1/3 of your gross income. If you’re making $8,000 per month, you can afford a mortgage of $2,667. Depending on the cost of your house or condo, perhaps you can find one with a mortgage payment that’s 1/3 of your monthly income, with a 15-year mortgage loan – especially if you’re into the idea of minimalist living.
Use this mortgage term and rate calculator to discover what your monthly payment might be with a 15-year mortgage.
2. Those who are purchasing a home or a second home later in life and want to be debt-free in retirement.
If you’re looking to buy a house at the age of 60, and want to retire at 75 with your house completely paid off, a 15-year mortgage would be a good option so you can enjoy more financial freedom and disposable income when you get there.
Who’s not a good candidate?
1. People who don’t have a steady job.
Higher monthly payments could reduce your spending flexibility. If you work in a project-based industry or are a freelancer, that might be too risky. “If you lose your job later and can't make the payments, you won't have enough income to qualify for refinancing into a 30-year loan's lower monthly bills,” according to The Street.
2. Those who don’t have any 401k or emergency fund savings.
“If a 15-year mortgage would consume all your extra cash and leave you unable to save for important financial goals like retirement, then the 30-year loan will always be a better option. A home isn't an asset you can sell easily in an emergency, and it won't give you income as a senior, so you cannot compromise other financial priorities just to pay off your home sooner,” according to The Motley Fool article.
3. Those who can get a better ROI.
You might be in a financial situation where it makes sense to keep a longer mortgage. For example, if you have a better investment that can yield a better return than the interest rate on your mortgage, you might not want to switch from a 30-year to a 15-year mortgage. “If you can earn 8% and can borrow at 4%, why would you not borrow the money for as long as possible?” points out NerdWallet.
Keep in mind; a 15-year mortgage isn’t the only potential way to save money on your mortgage over the long term. You can also get custom mortgage loans, such as a 20- or 25-year loan. Talk to your financial professional to find out what’s best for your personal situation, and head to Transamerica’s Knowledge Place to continue your research.
Have you opted for a 15-year mortgage? Share the factors that drove your decision below.
Neither Transamerica nor its agents or representatives may provide tax, investment or legal advice. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal advisors and financial professional regarding their particular situation and the concepts presented herein.
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