A Complete Guide To 15-Year Mortgages
UPDATED: Mar 30, 2024
With rising interest rates, many home buyers seek ways to lower their borrowing costs. One is to opt for a 15-year mortgage. But what type of loan is a 15-year mortgage, exactly? It’s a loan with a repayment period of 15 instead of 30 years and a mortgage rate that tends to be lower than longer-term mortgage rates. In this article, we’ll explain why, the pros and cons of getting a 15-year mortgage, and whether it could be the right option for you.
Mortgage Rates By Loan Type: Example
The shorter a loan’s term, the less risk it poses to the lender and the lower interest rate they’re typically willing to offer as a result. In fact, though mortgage rates fluctuate, data from Freddie Mac shows a clear pattern of 15-year rates consistently hovering below 30-year rates.
Here are the latest average mortgage rates for different loan types according to Freddie Mac, the Federal Reserve Bank of St. Louis, and U.S. News as of 13 March 2024:
| Loan Type |
Interest Rate |
|---|---|
| 15-Year Fixed Rate | 6.22% |
| 20-Year Fixed Rate | 6.43% |
| 30-Year Fixed Rate |
6.88% |
| 30-Year FHA Rate |
6.642% |
| 30-Year VA Rate |
6.414% |
| 30-Year USDA Rate |
6.631% |
| ARM 5/1 Rate |
7.85% |
What’s The Difference Between A 15-Year And A 30-Year Mortgage?
The main difference between a 15-year and a 30-year mortgage is the loan term. With the former, you must repay the loan within 15 years, whereas with the latter, you have 30 years.
Of course, this also leads to other differences. For example, 15-year mortgages have higher monthly payments since you have less time to pay them off. This also makes them less flexible. You only have 15 years to repay the loan vs. 30.
That said, 15-year loans let you build equity in your home faster and have lower total interest costs because you’re paying interest over a shorter period.
Whether you should choose a 15- or 30-year mortgage depends on your financial situation and priorities. In the long term, 15-year loans can lower your total interest costs and get you out of debt faster. In the short term, however, you’ll face higher monthly payments and less flexibility.
15-Year Vs. 30-Year Mortgage Example
| 15-Year Fixed-Rate Mortgage | 30-Year Fixed-Rate Mortgage |
|
|---|---|---|
| Home Price | $400,000 | $400,000 |
| Interest Rate | 5.90% | 6.875% |
| Monthly Payment (includes estimated taxes and insurance) | $3,086.42 | $2,627.17 |
| Total Interest | $162,955.13 | $436,781.99 |
| Total Payments | $482,955.13 | $756,781.99 |
To better grasp the difference between a 15- and 30-year mortgage, consider this example:
Assuming you buy a $400,000 house in Atlanta, Georgia, (ZIP code 30319) with a 20% down payment, a 15-year mortgage at a 5.9% interest rate would require a monthly payment of $3,086.42 (including estimated taxes and insurance). In contrast, the same house bought with a 30-year mortgage at a 6.875% interest rate would require a monthly payment of $2,627.17. In other words, you’d pay $459.25 more per month with a 15-year mortgage.
However, the total interest on the 15-year loan would only be $162,955.13 compared to $436,781.99 on a 30-year loan. Similarly, the total payments would amount to $482,955.13 compared to $756,781.99 on a 30-year loan. In other words, you’d save $273,826.86 in the long run by opting for a 15-year mortgage.
A major benefit of 15-year mortgages, then, is that the amount of total interest you pay is often a fraction of what you’d pay with an equivalent 30-year loan. That said, you may have to opt for a more modest home if you finance with a 15-year loan since your monthly payment will be higher.
15-Year Mortgage Calculator
Mortgage calculators help you get an estimated mortgage rate based on your financial situation. Our friends at Rocket Mortgage® offer a mortgage calculator that can help you determine your monthly mortgage payment and ultimately help you understand how much home you can afford. You can input the potential home price, down payment amount or percentage, your loan term, interest rate and ZIP code. You can either choose to input your annual property taxes and annual homeowners insurance or you can have your taxes estimated based on data from your state.
Remember that many factors go into the final calculation, including home price, down payment, loan term, interest rate and credit score.
Is A 15-Year Mortgage Right For You?
Now that you know what a 15-year mortgage is, consider its advantages and disadvantages:
Pros
- Lower interest rates: Because they pose less risk to lenders, 15-year mortgages tend to have lower interest rates than 30-year loans, reducing the loan’s total interest cost.
- Fewer mortgage payments: Since 15-year mortgages are paid off over 15 instead of 30 years, you’ll have fewer total mortgage payments (180 vs. 360).
- Mortgage may be paid off faster: 15-year mortgages are paid off twice as fast as 30-year mortgages, meaning you can be mortgage-free in half the time.
- Equity builds faster: When you pay off your mortgage in 15 instead of 30 years, you build equity in your home faster.
Cons
- Higher monthly payments: Since 15-year loans are spread across less time, monthly payments tend to be higher, which can make them less affordable in the short term.
- May only qualify for less-expensive properties: The higher monthly payment on 15-year mortgages means you may only qualify for less-expensive properties.
- Less money available for investments: The higher monthly payments on a 15-year mortgage leave less money to invest elsewhere, an opportunity cost you must consider.
- Potential for fewer tax deductions. While you may save on total interest costs, the lower interest payments of a 15-year mortgage may result in fewer tax deductions compared to longer-term mortgages.
Refinancing To A 15-Year Mortgage
Some home buyers start with a 30-year mortgage and later refinance to a 15-year mortgage. This could help reduce the loan term and interest rate but also increase your monthly payments.
To refinance a mortgage, follow these steps:
- Check your credit score. Most lenders require a credit score of at least 620 to refinance.
- Pay down as much debt as possible. The less debt you carry, the lower your debt-to-income (DTI) ratio.
- Get quotes from multiple lenders to compare rates and terms. This helps ensure you get the best possible deal.
- Apply for a refinance. This involves providing details about your personal finances.
- Lock in your interest rate. As soon as you qualify for a favorable interest rate, lock it in with the lender before interest rates rise.
- Close on the loan. Finalize the refinance to enjoy your new interest rate and loan terms.
Keep in mind that you may also need to pay closing costs and get a home appraisal to refinance.
15-Year Mortgage FAQs
Here are answers to frequently asked questions regarding 15-year mortgages:
Who is a 15-year mortgage best for?
A 15-year mortgage is best for those who can afford a higher monthly payment, want to build equity faster, and prefer to save on loan costs over their loan term. It’s also good for those who want to be mortgage-free sooner. For example, if you want to pay off your mortgage before retirement or other financial goals, a 15-year mortgage could be ideal.
How do I qualify for a 15-year mortgage?
To qualify for a 15-year mortgage, you should aim to first get your financial house in order by securing a stable income, saving for a down payment, improving your credit score, etc. From there, gather and compare loan offers from different lenders and apply to the best ones. A general rule of thumb is to look for a mortgage with a monthly payment of no more than a third of your gross monthly income.
How much would a 15-year mortgage cost?
The cost of a 15-year mortgage depends on the loan amount and interest rate, which, in turn, depend on the home’s value, the size of your down payment, and your creditworthiness. To get an estimate of how much a 15-year mortgage would cost, enter your details into a mortgage calculator.
What are the requirements for a 15-year mortgage?
Lenders typically require a credit score of at least 620, proof of stable income (e.g. two years’ worth of tax returns, W2 forms, or pay stubs), a debt-to-income (DTI) ratio of no more than 36%, and a down payment of at least 3%. Some lenders may have additional requirements, such as completing a first-time home buyer program or getting private mortgage insurance (PMI).
How does a 15-year mortgage impact my tax deductions?
If you itemize your tax deductions, you may be able to write off the mortgage interest paid on your 15-year mortgage, your property taxes, and any private mortgage insurance (PMI). Consult a professional tax professional to learn more.
What is considered a good interest rate on a 15-year mortgage?
As with all rates, 15-year mortgage rates fluctuate. A good rate will depend on the current average rate, your credit score, the loan-to-value (LTV) ratio, and more. That said, 15-year mortgage rates tend to hover around 0.5% – 0.75% lower than their 30-year counterparts.
The Bottom Line
Ultimately, 15-year mortgages can be a great way to build equity faster and lower the long-term cost of borrowing. But home buyers must also consider the higher monthly payments and whether they can afford them. When in doubt, discuss your loan options with a lender. They can help you choose the loan type that best suits your goals and financial situation.
Ready to start the mortgage process? Apply with our friends at Rocket Mortgage® today.
Christian Allred
Christian Allred is a freelance writer whose work focuses on homeownership and real estate investing. Besides Rocket Mortgage, he’s written for brands like PropStream, CRE Daily, Propmodo, PropertyOnion, AIM Group, Vista Point Advisors, and more.
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