An old-time mortgage that is once again proving popular is the 15-year fixed rate mortgage that lets homebuyers own their homes free and clear in 15 years. And, while the monthly payments are somewhat higher than a 30-year loan, the interest rate on the 15-year mortgage is usually a little lower, and importantly - the homebuyer pays less than half the total interest cost of the traditional 30-year mortgage.
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Who It's For
The 15-year fixed rate mortgage has proved popular with two very different groups of homebuyers. First, it enables young homebuyers with sufficient income to meet the higher monthly payments to pay off the house before their children start college. They own more of their home faster with this kind of mortgage. Other homebuyers, who are more established in their careers, have higher incomes and whose desire is to own their homes before they retire, may also prefer this mortgage. The 15-year fixed rate mortgage gives them additional financing options using the house's equity. For example, they can easily take out a second mortgage if they want to make use of the equity in their home. But you need not fall into either category to appreciate the savings the 15-year fixed rate mortgage affords homebuyers. Let's take a closer look at some of the pros and
cons of this type of mortgage and what savings you may expect.
AdvantagesThe 15-year fixed rate mortgage offers the qualified consumer five big advantages.
- You own your home in half the time it would take with a traditional mortgage.
- You save more than half the amount of interest of a 30-year mortgage. On a $200,000 mortgage at 5.75 percent, you save more than $140,000.
- Lenders usually offer this mortgage at a slightly lower interest rate than with 30-year loans - typically 0.5 percent to 1.0 percent lower. It is this lower interest rate added to the shorter loan life that realizes the savings for 15-year fixed rate borrowers.
- Fixed rate means exactly that - no matter where mortgage interest rates go, the payments for this mortgage stay the same from the first to the last. This helps many borrowers plan their budgets with more certainty. They know that their monthly payments will not increase (or decrease) and throw their financial planning off.
- 15-year mortgages can be insured by the Federal Housing Administration (FHA) and the Veterans Administration (VA), and with private mortgage insurance.
DisadvantagesThe disadvantages associated with a 15-year rate mortgage are really the qualifiers that will tell consumers if this is the mortgage for them.
- The monthly payments for this type of loan are higher than those for a 30-year mortgage, roughly 10 percent to 15 percent higher per month.
- Because borrowers pay less total interest on the 15-year fixed rate mortgage, they lose the maximum mortgage interest tax deduction.