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Apr 2018

15-year fixed-rate loan – What are the pros and cons

When you’re ready to buy a home, all the different loan options can be overwhelming. There are different loan names, varying term lengths, and many other factors to consider. But don’t worry, your mortgage banker will be your go-to source for all things mortgage-related. They’ll be able to guide you through the process and explain all your options. There are a few different loan term options, or the amount of time you have to pay back your loan. Some of the most common loan terms are 15-year and 30-year loans. Additionally, you’ll choose either a fixed-rate or an adjustable-rate mortgage loan. Each loan has its benefits to meet your specific needs. For now, let’s focus on a 15-year fixed-rate mortgage loan.

For a 15-year fixed-rate loan, “15” refers to the loan term and “fixed-rate” refers to the interest rate.

What is a 15-year fixed-rate mortgage?

A 15-year fixed-rate mortgage loan is a loan that you pay back over 15 years and has the same interest rate throughout the life of the loan. Your loan term and rate affect many parts of your mortgage and payment, including the amount you owe each month and the total interest you’ll pay, along with a few other factors. Let’s talk through this loan option.

The loan term

One of the biggest advantages of a 15-year fixed-rate mortgage loan is that you’ll pay off your loan in half the time you would if you had a 30-year loan. This may seem obvious, but this shorter loan term also means paying less toward interest in the long run. A 15-year loan term also means you’ll also build equity faster. By paying off your mortgage loan quicker, a 15-year fixed-rate loan allows you to focus on other things in your life, including saving for retirement, paying college tuition for your children, and traveling, among other things. While a shorter loan term often offers a lower interest rate, it also means that your monthly payment will most likely be higher than if you paid off your loan over 30-years. We’ll talk more about this coming up.

Your monthly payment

Since you’re paying off your loan in less time with a 15-year fixed-rate loan, you will also pay less interest total, verses a 30-year loan. This is because you’re borrowing money for a shorter amount of time, and therefore, you are less of a risk to your lender. As we mentioned, your monthly payment may be higher with a 15-year loan than with a 30-year loan term. If your loan amount is $184,000 and you have a fixed interest rate of 3.25%, you’ll pay about $1,045 every month with a 15-year loan, verses about $710 a month with a 30-year loan. Because your monthly payment will most likely be lower with a 30-year loan term than a 15-year, you may be able to qualify for a larger loan amount if you choose a loan with a longer term.

Interest rates

Shorter loan terms often have significantly lower interest rates. In the example above, for a mortgage loan of $184,000, notice how different the interest rates are for a 15-year loan verses a 30-year loan. This is because lenders assume less risk when you borrow for a shorter amount of time, and they get their interest back faster.

With a fixed-rate loan, your loan’s interest rate will remain the same throughout the life of the loan. That means that if your interest rate is 3.7%, it will be 3.7% next year, the year after that, and 15 years from now when you make your final payment. Since interest rates fluctuate daily, this can be a good thing — if interest rates rise, you’re protected and locked in at your lower interest rate.

However, the opposite is also true. If you choose a fixed-rate loan, interest rates may drop lower than your rate. If your rate is locked in at 3.25%, for example, and the rates drop to 3% or 2.8%, your rate will stay at 3.25%. With an adjustable-rate mortgage, your interest rate fluctuates with the market after your initial rate period. It’s important to remember than with an adjustable rate loan, your interest rate may also rise, leading to higher monthly payments and greater interest paid throughout the life of the loan.

Do you think a 15-year fixed-rate loan is right for you? Or maybe a 30-year loan term would work better for you. Talk with a mortgage banker for more information. They’ll be able to walk you through the ins-and-outs of your loan options and suggest the mortgage product that’s right for you.