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5 Tips To Afford A 15-Year Mortgage

Money Crashers5-minute read

October 12, 2020

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Deciding what length of mortgage to choose when you’re buying a home is an impactful financial decision. While 30-year mortgages often make the most sense (about 90% of home buyers choose that option), some home buyers opt for a shorter 15-year mortgage in order to pay the debt off more quickly.

A 15-year mortgage has other benefits as well. Lenders usually offer a lower interest rate on 15-year mortgages. And since you’re paying the loan off in half the time, you’ll pay significantly less in interest throughout the life of the loan than you would with a 30-year mortgage.

Another benefit of the 15-year mortgage is you build up equity faster since you’re paying at an accelerated pace. Plus, although you’re paying more in monthly payments, you’ll enjoy the freedom of living in a paid-for house much sooner.

How can you be sure you can afford the higher monthly payments on a 15-year mortgage? Here are five tips to help you determine if a 15-year mortgage fits your budget — and to help you stay on track financially as you pay it down.

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1. Compare The Total Cost Of A 15-Year Vs. A 30-Year Mortgage

When calculating your home expenses, do a complete comparison of your 15-year and 30-year mortgage options. Be sure to figure in the interest rate you’ll pay with each since 15-year mortgages typically have a lower rate.

Look at your monthly payments as well as the total cost of your home with both types of mortgages. 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.

2. Build Up Your 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 expensive medical event. Those unexpected costs can devastate your finances. An emergency fund protects you in the event of financial hardship.

Before taking on any type of mortgage, especially a 15-year one, be sure you’ve saved up a robust emergency fund. Financial experts recommend saving enough money in an emergency fund to cover three to 6 months’ worth of expenses.

When calculating your emergency fund needs, look at your budget and your monthly bills. Omit any expenses that are true luxuries (in other words, things you’re not obligated to keep spending on in an emergency). Keep all fixed costs like car payments, and also include estimates of your variable expenses like utilities and food. Figure out what your mortgage payment will be on a 15-year term and be sure your emergency fund will cover it in case you lose your job or face another unexpected expense.

3. Choose A Reasonably Priced Home

Deciding whether or not 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.

A 15-year mortgage can be to your benefit if it helps you to curb your excitement and purchase a more affordable home. It can also force you to prioritize paying off your home more swiftly.

By buying a house that you can afford on a 15-year repayment schedule, you lower your risk of buying an extravagant house and becoming “house poor.”

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4. Consider The Opportunity Cost

Some home buyers like the concept of paying off their house in 15 years because it’s a quicker route to becoming debt-free. They also love the idea of saving money long-term due to lower interest rates and less interest paid overall. But there are some opportunity costs involved in getting a 15-year mortgage.

By tying up a greater percentage of your income in your house payments, you are automatically left with less money to invest in other assets. For example, you may not be able to save as much in a 401(k), Roth IRA, or college fund while paying down a 15-year mortgage.

Your home is a nice asset to own, but it won’t make up for lackluster retirement savings. So be sure to balance your various financial needs (and the timing of each of those needs) as you make your mortgage-term decision.

Opportunity costs are not necessarily a deal breaker. You may find more appeal in having a paid-for house in 15 years than in investing larger amounts in retirement. Just make sure you factor these costs in as you weigh the pros and cons of a 15-year mortgage.

5. Consider Your Cash Flow

When determining your mortgage terms, it’s imperative to examine your cash flow. What are your current circumstances? How likely is it those circumstances might change in the near future? If your income is especially high right now but you don’t know whether you’ll maintain that income for years to come, your cash flow could be impacted down the road.

Debt is another factor impacting your cash flow. Lenders examine your debt-to-income ratio before granting you a home loan because they need to make an educated guess as to how capable you will be of making payments on time and in full for many years. In many cases, a 43% debt-to-income ratio is the highest benchmark a borrower can have and still receive a qualified mortgage.

The lower your debt-to-income ratio (or even being completely debt-free), 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.

In addition to your debt, think about future big expenses you may face. If you have children heading to college or planning weddings, you may want to take those costs into account when buying a home. Even though you can’t predict every expense you’ll face over the next 15 years, make some educated guesses. If you foresee a lot of expensive events in the future, those will impact your cash flow and your ability to pay your mortgage.

It’s important to leave some space in your budget for spending more than you expect. This doesn’t just apply to major expenses like medical emergencies, but also to the small expenses that tend to add up. Don’t take on a mortgage that leaves you zero wiggle room in your budget.

Final Thoughts

A 15-year mortgage isn’t the best choice for everyone, but these five tips can help you to make an informed decision. You could save thousands of dollars in interest payments by choosing a 15-year mortgage, as long as you approach it with planning and diligence.

Tamara Levine worked in financial services for 30 years and now offers advice and consultation to small banks and businesses.

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