10 tips for affording a 15-year mortgage

When you apply for a mortgage, you’ll have to choose the loan’s term, with the most popular options being a 15-year or 30-year mortgage. Generally, 30-year mortgages are more popular, but a 15-year mortgage offers some benefits, such as lower rates and a lower overall cost. However, the shorter term means monthly payments will be higher.

Those higher monthly costs can mean that 15-year loans aren’t affordable for all borrowers, but it’s worth checking to see if you can manage the payments given how much you can save in the long run.

1. Calculate the costs of a 15-year vs. a 30-year loan

To decide which loan is right for you, a complete comparison of your 15-year and 30-year mortgage options is the first step. Importantly, the interest rates on 15-year mortgages typically have a lower rate than their 30-year counterparts.

Figures to compare between the two types of mortgages include monthly payments and the total cost of your home. See how much you’d save in interest with a shorter loan period, then weigh the long-term benefit against the short-term pain of higher monthly payments.

Rocket Mortgage’s amortization calculator can help you see the difference in payment and how much money you’ll save based on the term you choose for a loan.

2. Make sure the payment is affordable for you

Once you know the monthly payment of each loan, the next step is to see if the payment for a 15-year mortgage will be affordable. That means ensuring you have the monthly income to handle your payment each month with room in your budget to spare. This is a good way to avoid becoming “house poor.”

One way to make the payment more affordable is to boost your income, but that’s easier said than done. Instead, you can consider taking steps to lower the payment. Making a larger down payment, meaning borrowing less, is one option. Another is to try to secure a loan at a lower rate.

Rates change regularly, so it’s a good idea to track them so you can see when rates are rising or falling. Rocket Mortgage regularly publishes rates, which makes it easier to keep track of rates. When you see a good rate, consider working with a lender to get a rate lock, which usually lasts between 15 and 60 days. That lets you lock in an interest rate while you shop for a home and go through the closing process.

3. Buy a home that’s under budget

Deciding whether to take out a 15-year mortgage also depends on the home you choose to purchase. Since your monthly payments will be higher than with a 30-year mortgage, going the 15-year route will likely require you to lower the total amount of mortgage debt you’re willing to take on.

That may mean intentionally looking for homes that are under your budget. Often, people base their budget on the amount they can afford to pay for their mortgage each month. Experts recommend setting this level at no more than 28% of your gross monthly income. For example, if you make $8,000 per month, that means having a mortgage payment no higher than $2,240.

Now imagine you want to buy a home that costs $300,000. A 30-year loan at 6% interest would have a monthly payment of just under $1,800 per month, which would be affordable on an income of $8,000 per month.

Get the same loan but at a rate of 5.5% and a term of 15 years and the payment becomes $2,451, which is not affordable by that metric. You’d need to go under budget and get a loan of no more than $275,000 for a 15-year loan to be affordable.

By buying a house that you can afford on a 15-year repayment schedule, you lower your risk of buying something too expensive.

4. Make a larger down payment

When you buy a home, you have to make an upfront payment, called a down payment. Usually, you need to make a minimum down payment equal to a few percent of the home’s value, but there’s nothing stopping you from making a larger down payment.

That larger down payment means you borrow less money, which means a lower monthly payment.

Imagine you want to buy a home that costs $400,000. With a 3% down payment, you’d have to put down $12,000 and would borrow $388,000. If you get a 15-year loan at 5.5% interest, that’s a monthly payment of $3,170.

Make a 20% down payment of $80,000, and you only have to borrow $320,000. With the same loan rate and term, the payment falls to $2,614, a decrease of a bit more than $500 per month.

There are many ways to make a bigger down payment, including saving money before you buy a home or looking for down payment assistance programs offered by local governments or organizations.

Rocket Mortgage’s down payment calculator can help you see precisely how a larger down payment could impact your monthly payment.

5. Avoid paying PMI

When you get a mortgage, you may need to pay for private mortgage insurance (PMI). This insurance does not protect you. Rather, it protects your lender from the possibility that you’ll default on the loan. Despite it not protecting you, it does add to your monthly loan payment.

Typically, you have to pay PMI on conventional loans when you make a down payment of less than 20% and it usually totals 0.5% to 1% of the loan amount each year.

Making a 20% down payment has the dual benefit of letting you avoid PMI and reducing the amount you need to borrow, further lowering your monthly payment.

6. Lower your debt-to-income ratio

Lenders examine your debt-to-income ratio before granting you a home loan. This is the percentage of your monthly income that you have to dedicate toward debt payments.

The formula is: monthly debt payments / monthly income. For example, if you make $5,000 per month and you have total debt payments of $1,500, your DTI ratio is $1,500 / $5,000 = 30%.

Calculating DTI helps lenders determine how likely you are to default on your loan payments. In many cases, a 43% debt-to-income ratio is the maximum a lender will allow.

The lower your debt-to-income ratio, the better equipped you will be to make consistent monthly payments. Consider your total debt before committing to a 15-year mortgage, because the less debt you have, the better your cash flow situation will be.

7. Improve your credit score

Lenders reward borrowers with higher credit scores by offering them lower interest rates. The lower your interest rate is, the smaller your monthly mortgage payment will be. If you can, start looking for ways to improve your credit before you apply for a 15-year loan.

Generally, the better your score, the better your chances of getting a loan. Many lenders require a minimum score of 620, though this isn’t necessarily required by every lender if you want a conventional loan, especially if you have a large down payment.

To help build credit, make sure you pay your bills on time each month. If you carry a balance on your credit cards, work out a plan to make more than the minimum payment as often as possible. Pay off existing debts aggressively and avoid applying for new loans before you apply for your new mortgage or refinance.

Over time, your credit score should go up, making it easier for you to qualify for a 15-year mortgage in the first place. The better your credit score is, the more affordable your mortgage payment will be.

8. Consider your long-term goals

Regardless of the price of your home, a 15-year loan will have higher monthly payments. Those monthly payments help you build equity in your home faster, but you risk making it harder to cover those surprise expenses when they pop up.

Before you decide on a 15-year loan, think about your long-term goals. If you’re trying to build equity in your home faster or want to own your home outright sooner, finding ways to budget for those higher monthly payments makes sense.

However, if you’re just trying to get into a home and want the lowest possible payment or plan on selling your home in the near future, a 30-year or an adjustable-rate mortgage (ARM) may be a better choice.

9. Create a healthy emergency fund

Even if you’re in great shape with steady income now, that doesn’t mean you won’t ever face a job loss or an expensive medical event. An emergency fund protects you in the event of financial hardship and helps ensure that you’re still able to pay your mortgage and regular expenses on time.

Before taking on any type of mortgage, be sure you’ve saved up a robust emergency fund. This is doubly important if you’re getting a 15-year mortgage because the payment will be much larger than that of a 15-year loan.

Ideally, you’ll want to keep enough money in an emergency fund to cover 3 – 6 months’ worth of expenses.

That means that if you have a $2,000-a-month mortgage payment, you need $6,000 to $12,000, plus whatever utilities, bills, and groceries cost each month. You might be looking at a minimum of $10,000 or $15,000 to handle a few months without income.

10. Pay your closing costs up front

Every loan has closing costs. While you can typically roll those costs into your loan, it will increase the amount that you’re borrowing from your lender. This can make your monthly payments more expensive for the life of the loan.

Rather than rolling the closing costs into your loan, try to pay them upfront. You’ll end up having to pay cash at closing, but you’ll save yourself from having to pay interest on the closing costs for the full 15-year loan term.

The bottom line: 15-year mortgages require careful budgeting

15-year mortgages offer an opportunity to save money, both by letting you secure a lower interest rate and reducing the total interest you pay by leaving less time for interest to accrue. However, these shorter loans come with a much higher monthly payment, which can make them more difficult to afford. It’s important to carefully assess your budget and make sure you can afford the monthly payment before committing yourself to a 15-year loan.

If you’re ready to apply for a mortgage, whether it’s a 15- or 30-year loan, you can reach out to Rocket Mortgage and submit your application today.