Make Money From Home

4 Reasons to Steer Clear of a 15-Year Mortgage – The Motley Fool

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You could regret taking out a mortgage loan with a short payof…….

Image source: Getty Images

You could regret taking out a mortgage loan with a short payoff time.

Key points

  • A 15-year mortgage is one of several types of loans home buyers can use.
  • This loan type may seem attractive due to the low payoff costs over time.
  • However, there are some major downsides of 15-year mortgages, including more risk.

When you’re using a mortgage to buy a home, you’ll have to decide what your loan repayment term will be. Most lenders offer a choice of several options, including a 30-year or a 15-year mortgage.

A 15-year mortgage has a lower interest rate, and it costs less over time. Both of these features can make this loan seem attractive to borrowers. Some people are also excited about the idea of becoming debt free in half the time.

But before you opt for a 15-year loan, consider these four big reasons why this may not be the right mortgage for your situation.

1. There’s a huge opportunity cost to tying up your money

When you choose a 15-year mortgage, you commit to making higher payments than with a longer loan term. You’re locked into making these payments for the entire life of the loan, which means you’re taking on a huge financial commitment for 15 years.

When you’ve promised so much money each month to your mortgage lender, you can’t do other things with it — such as investing. Since mortgage interest rates are pretty low and the return on investment (ROI) you earn by paying off your loan early is simply saved interest, you’re accepting a ROI far below what you could probably earn through investing in stocks or ETFs.

Committing to such a big monthly payment could also leave you with less money to pay off high-interest debt or to cover your other living costs, making it more difficult to stay on budget.

2. Your loan could be more difficult to qualify for

Since a 15-year loan has higher monthly payments, you may have more difficulty qualifying for the loan depending on your financial credentials. You might have to use a lender that allows a higher debt-to-income ratio, rather than being able to choose from a wide array of different loan providers. This makes it harder to find a loan with the best rates and terms.

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