This choice alone can add hundreds to your mortgage payment – but sometimes it can be a good decision

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Should you consider a 15 year mortgage rather than a 30 year loan?


Key points

  • A 15-year mortgage costs a lot more each month than a 30-year mortgage.
  • There are certain advantages to a 15 year mortgage.
  • You will need to consider your personal circumstances to decide what is right for you.

When you get a home loan, you are going to have to make important choices. Any of these decisions could end up making your loan cost hundreds of dollars more per month. But in some cases, it’s the right decision.

So when should you opt for a loan with higher monthly payments? Here’s what you need to know.

Choosing this type of mortgage could make your loan payment significantly higher

The decision that would make your mortgage payments much more expensive each month is to take out a 15-year loan instead of a 30-year loan.

A 15 year mortgage has a much lower interest rate than a 30 year loan and it can cost you a lot less over time. But since you have half the time to repay your mortgage in full, the monthly payments are significantly higher.

For example, suppose you borrow $200,000 and are trying to decide between a 15-year and a 30-year loan. Based on current interest rates as of June 26, 2022, a 15-year mortgage would likely have a rate of around 5%, while a 30-year mortgage might have a rate of around 5.90% .

The monthly payments on your 30-year mortgage in this scenario would be approximately $1,186, while the monthly payments on a 15-year mortgage would be approximately $1,582. Even though you would pay a much lower rate, you would be stuck paying around $396 more per month. It is a substantial sum of money.

Over time, however, the 15-year loan would cost you $84,686 in interest charges, while the 30-year loan would cost $199,238.00. So you would be paying a lot more money each month, but you would be paying it for a lot less time and saving a little money at the end.

When is a 15-year loan a good choice?

In general, a 15-year mortgage is not the best loan for most people, despite some experts like Dave Ramsey recommending it.

Since a 15-year loan costs so much more, you’ll tie up so much of your money that you can’t invest in assets that produce a higher rate of return. You’ll also increase your risk of foreclosure by committing to larger payments, and leave much less flexibility in your budget.

But if you have a lot of money to invest in other things, you don’t worry about higher monthly bills, and getting out of debt as soon as possible is really important to you, then a loan on 15 years might be a good option. Since choosing this type of mortgage would allow you to pay a lower interest rate and therefore make your repayment process less expensive, you could end up much happier in the end.

Remember to consider the serious disadvantages of a loan with a shorter repayment period, and make sure it really is the best decision. If so, accepting a loan with a higher monthly payment might be the better choice in the end.

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Elaine R. Knight