Is a 15-Year Mortgage Right for You?

As mortgage rates continue to drop, many homebuyers are considering mortgage products that they may not have considered before. Currently, those rates are averaging below 4.36 percent which is prompting many people to opt for a 15-year fixed mortgage when they buy their home. For 15-year fixed rate loans, the rate is a couple percentage points below 4 percent. While this is good for some buyers, is it good for you?

During the first half of this year, more than 25 percent of the people who chose to refinance their home chose a 15-year fixed rate mortgage. That’s about a 6 percent increase over all of 2009 and nearly triple the number of people who chose the 15-year option when refinancing in 2007. These are ideal mortgage products because you can pay off your home in half the time as a 30-year mortgage and you will pay less interest over the term of the loan. In short, it’s a cheaper way to own your home.

The recent economic problems the nation has gone through has made many people rethink their debt. People want to pay off their mortgage and just be done with it even if it means having fewer dollars in their pocket each month until the loan is paid. This shift is significant as more and more homeowners are viewing their homes as safer investments than putting their money in stocks and bonds.

Before jumping into a 15-year fixed rate mortgage, however, it’s important to do that math. While you will get a better rate for choosing this mortgage product and you will pay thousands of dollars less in interest over the term of the loan, you have to be sure you can afford the monthly payments. The payments won’t be double the amount of a 30-year fixed rate mortgage, but they will be significantly higher. For instance, if your have a $200,000 loan at 4.5 percent interest on a 30-year mortgage, you would have a payment of about $1,015 per month. If you change that to a 15-year fixed mortgage with 4 percent interest, you will pay about $1,500 per month. If that’s something you can afford and still have money to pay bills with disposable income left over, a 15-year fixed rate mortgage may be the best way to go.

Of course, you have to consider your credit history when choosing a mortgage product. You may not qualify for the lowest rate and your income may not be able to support a 15-year mortgage. In this case, you can always opt for a 30-year mortgage and then reevaluate your income and your credit in a few years. You may come out ahead if you refinance after a few years once you have upped your income and cleaned up your credit.