March 2, 2021

Mortgages: Exploring the 15-Year Loan for Refinancing

Fifteen-year mortgage rates certainly look enticing these days, and the idea of owning a home, debt-free, in less time than it takes to raise a child, sounds grand. So what’s the catch?

To start with, your monthly payment will probably be higher — in some cases, hundreds of dollars more. Then there’s the question of whether you will save for other needs if your mortgage payment requires more of your income. So before you choose between a 15- and a 30-year loan, crunch the numbers on each using an online mortgage calculator.

On a $300,000 loan, for example, you would pay about $1,475 a month for principal and interest over 30 years, versus $2,145 over 15 years. That assumes a 4.25 percent rate on the longer loan and 3.5 percent on the shorter one.

You would save about $145,000 in interest payments over the life of a 15-year mortgage and build up equity in the home faster, according to Tony Clintock, a regional sales leader for MetLife Home Loans, which is based in Irving, Tex. In the first year, principal would be reduced by $15,000, versus about $5,000 on a 30-year loan.

The other advantage of having a 15-year loan is the interest rate: it’s currently hovering around 3.4 percent, according to Freddie Mac, which is more than three-quarters of a percentage point lower than most 30-year loans. They can “shave 5, 7 or 10 years off their loan,” Mr. Clintock said. And if they’re reducing their interest rate from, say, 6 percent, their monthly payment may not change much.

But, “a lot of people cannot afford a 15-year mortgage,” said Robert Rauf, a mortgage loan originator with Real Estate Mortgage Network in Manasquan, N.J. In other words, their income simply cannot support the higher monthly bill.

Those worried about job security or a business failure may also opt for a 30-year mortgage, and the lower monthly payments that go along with spreading out the loan length. “It’s the cheapest way to borrow money,” said Ray Mignone, a financial planner in Little Neck, N.Y.

But “if people are pretty confident on their income stream and they can afford the 15-year mortgage,” he said, “it is a good way to go.”

More consumers are moving into 15-year mortgages when they refinance, according to data from CoreLogic. In 2007, one in nine, or around 11 percent, opted for a 15-year mortgage; in the first quarter it was 53 percent.

Lenders say the 15- and 30-year loans use the same criteria for qualifying. Mr. Clintock of MetLife notes that some banks offer loans in 20- or 25-year terms, but with rates not much lower, if at all, than those on the 30-year mortgage.

When deciding between a 15- and 30-year mortgage for refinancing, borrowers should also take a broad look at other expenses, said Karen C. Altfest, the executive vice president of Altfest Personal Wealth Management in Manhattan. “Some people have such a high mortgage they can’t save for retirement” or their children’s college education, she said. Others may compromise with a 20- or 25-year mortgage, and use the difference to help fund college or retirement accounts.

Ms. Altfest also urges borrowers to think through the tax breaks that home loans provide. The interest on a 30-year mortgage can be important to tax planning, especially in the early years when almost the entire payment is interest.

Then again, you may wonder whether Congress could eliminate mortgage interest and fees as a tax deduction, an idea that has been floated. If it were to happen, the 30-year mortgage would be less appealing, Ms. Altfest said.

“Consider the psychological, consider the financial,” she said. “Consider your family goals.”

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