Make Money From Home

Why You May Not Want a 15-Year Mortgage Right Now — Despite the Lower Rate – The Motley Fool

Image source: Getty Images

A shorter-term loan may not be your best option after all.


Image source: Getty Images

A shorter-term loan may not be your best option after all.

Key points

  • You’ll generally get a lower interest rate on a 15-year mortgage than with a longer-term loan.
  • Since home prices are up so much, the larger payment you get with a 15-year loan may not be affordable.

If you’ve been tracking mortgage rates at all, you may be aware that it’s gotten exponentially more expensive to finance a home over the past few months. Throughout 2021, the average 30-year mortgage rate sat at under 4%. As of this writing, it’s 5.358%. That makes a huge difference when it comes to borrowing for a home.

Because borrowing rates have jumped so much in a short amount of time, you may be thinking of signing a 15-year mortgage for the home you buy. Doing so will generally mean snagging a lower interest rate on your mortgage and reaping savings that way.

It’s a good idea in theory — especially if you don’t like the idea of spending money on interest. But it may not work out for one big reason.

Can you swing a higher monthly payment?

The upside of taking out a 15-year mortgage is landing a lower borrowing rate on your home loan. The downside is getting stuck with higher payments on a monthly basis. And given that home prices are up on a national level, those higher monthly payments may be a big strain on your budget.

As of this writing, the average 15-year mortgage rate is 4.471%. Meanwhile, the National Association of Realtors reports that in March, median existing home sale price rose to $375,300. That’s a 15% increase from the year prior.

Now, let’s say you’re buying a home that costs $375,000 and you can make a $75,000 down payment, which is 20% of that purchase price and the minimum you’d need to avoid private mortgage insurance. If you take out a 30-year mortgage at today’s average rate, you’ll have a monthly principal and interest payment of $1,676. If you take out a 15-year loan at today’s average rate, your monthly principal and interest payment will be $2,291. That’s a $615 difference.

Now it’s definitely worth noting that if you go with a 15-year loan, you’ll end up spending $190,789 less in interest in the course of paying off your home. That’s clearly not a small amount of money.

But the question is whether …….


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