Assessing the 15-Year Mortgage: Is It the Right Fit?

Buying a house comes with a myriad of decisions – both large and small. How big of a backyard do you want? How much space does your child need? Do you really need a guest bedroom for your mother-in-law?

Once you’ve found the house you want, the next step is deciding what mortgage to choose.

There are a variety of reasons to go with the 15-year mortgage – some obvious, some not-so-obvious. But before you sign with the bank, consider the following pros and cons to see if a 15-year mortgage is right for you and your new abode.

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When It’s Right for You

• When you want to pay off debt. Being debt free can ease your financial anxiety. Considering the fact that money issues are one of the top reasons for divorce, paying off your mortgage could strengthen your bottom line, improve your relationships and decrease the stress in your life. Being debt free in 15 years is much easier to comprehend than being debt free in 30.
• When you want to save on interest. The difference between a 15-year mortgage and a 30-year mortgage for a $200,000 house at current average interest rates (4.125% for a 15-year and 4.750% for a 30-year) is $107,038. That difference can be enough to buy another house or retire a few years early. It can even help you leave a legacy behind for your children.
• When you’re about to retire. One of the keys to a successful retirement is decreasing your expenses. You’ll likely be living on a fixed income, so a lower cost of living will likely lead to a smoother retirement. Since a mortgage is usually the biggest monthly bill, paying it off can significantly lessen how much you need to retire on.
• When you don’t trust yourself to be responsible with the difference. The monthly difference for the mortgage example given above is about $450 a month or $3,400 a year. If you don’t trust yourself to use the difference between the two payments to pay off your other debt, save for an emergency fund or invest in your retirement, it may be a good idea to choose the higher monthly payment.

When It’s Not Right for You

• When cash flow is tight. A 15-year mortgage comes with a higher monthly payment than the 30-year option, so it’s best for people who can afford the bigger bill. Your monthly mortgage payment should be around 25% or less of your take-home pay. If a 15-year mortgage is higher than that, go with the 30-year option or look at a cheaper house.
• When you need to invest more. Instead of paying a higher monthly mortgage bill, it may be worth it to take a longer mortgage and invest the difference. The current average 30-year mortgage interest rate is hovering around 4%, while you can earn more than 7% from an index fund.
• When your income is variable. While paying off your mortgage is a virtue, it’s also a good idea to have money where you can easily access it. If you fall on hard times, it may be difficult or impossible to quickly access the equity in your home. That’s why a lower monthly payment is a better idea for people whose income can suddenly change.
• When you have other major expenses. A higher mortgage bill may derail your other financial goals, like paying for your child’s college education or helping your mother afford a nursing home. A lower mortgage can make it possible to buy a home and still fulfill your other dreams.