How a 15-Year Mortgage Works

Modified date: October 9, 2023

With so many mortgage alternatives available, feeling a little bewildered and puzzled is normal. Anyone’s brain would spin trying to make sense of it all! The 15-year mortgage may catch your eye when you compare the various options for financing your new house. However, how does this financing option compare to the alternatives?

Let’s examine the 15-year mortgage in more detail to understand how it functions and why it’s one of your most excellent choices when purchasing a home.

Table of Contents show

What Is a 15 – Year Mortgage?

A mortgage with a term of 15 years has a set interest rate and monthly payment throughout the loan. Due to the potential long-term savings, some borrowers choose the 15-year mortgage over the more common 30-year mortgage.

There are many different kinds of mortgage options on the market right now. Comparing the 15-year mortgage to the 30-year mortgage reveals certain benefits and drawbacks. However, both products have features in common, such as the fact that the borrower’s credit history and credit score can affect the interest rate.

A borrower’s likelihood of repaying loans is expressed numerically by their credit score. Payment on time, length of credit history, and the number of open credit accounts are all aspects that affect credit scores.

Benefits of a 15-Year Loan

The benefits of a 15-year mortgage over a 30-year mortgage are listed below. Both have set rates and periods for their fixed payments.

Less Interest Overall: Long-term costs are lower for a 15-year mortgage than a 30-year mortgage since the total interest payments are lower. Because you’re borrowing the money for half as long as you would if you were taking out a 30-year mortgage, the annual interest rate used to determine the cost of a mortgage is also used. Your monthly payment and the difference between a 15- and 30-year mortgage can both be determined using a mortgage calculator.
Reduced Interest Rate: A 15-year mortgage typically has an interest rate lower than a 30-year mortgage since short-term loans are less risky and cost less for banks to fund than long-term loans. The rate can be one point or one quarter-point less than the 30-year mortgage.
Fannie Mae: You’ll probably wind up paying less in fees for a 15-year loan if your mortgage is purchased by one of the government-sponsored organizations, like Fannie Mae. When it comes to what they refer to as loan-level pricing changes, Fannie Mae and the other government-backed companies frequently only charge for 30-year mortgages or charge more for them. Borrowers that put down lesser down payments and have poorer credit scores are often subject to these costs. Mortgage insurance costs are reduced for borrowers with 15-year terms by the Federal Housing Administration (FHA).
Compelled Savings: Financial advisors view a 15-year mortgage as a form of forced savings because the monthly payment is more significant. In other words, you would invest in your home, which will likely increase in value over time, rather than taking the monthly savings from a 30-year and depositing the money in a money market account or the stock market.

Drawbacks of a 15-year Mortgage

Even though a 15-year mortgage saves money on Interest, consumers should examine a few factors and drawbacks before choosing the length of their loan.

Increased Monthly Payments: The monthly payment is more significant since a 15-year mortgage must be repaid twice as long as a 30-year mortgage. For instance, the monthly payment for a $250,000 loan with a 15-year term and 4% interest is $1,849 instead of $1,194 for 30 years. In other words, for the same amount at the same rate, the monthly payment for a 15-year loan is 55% greater than for a 30-year loan. With government-sponsored goods, most borrowers will pay less upfront; instead, they’ll pay these expenses as part of a higher interest rate.
Decreased affordability: The buyer could only purchase a less expensive home than they could with a 30-year loan due to the higher payment. Assuming the mortgage lender will only allow a maximum of $1,500 per month, let’s use the example from above. A $200,000 mortgage at 4% for 15 years translates into a $1,479 payment. Therefore, the borrower would have to purchase a less expensive home.
Spending Less on Savings: A year’s income in liquid savings is needed to cover the increased payment in cash reserves. Additionally, because of the increased monthly payment, a borrower may forfeit the chance to accumulate savings or save for objectives like a child’s college expenses or retirement.

Requirements for 15-Year Mortgages

As with any mortgage, demonstrating your ability to make the monthly payments is a crucial need to be approved for a 15-year mortgage. This is especially true of 15-year mortgages because you must make larger monthly payments to pay off the loan in half as long as you would with a 30-year mortgage. The ability to repay the loan will be proven to the lender by supporting documentation.

A healthy debt-to-income (DTI) ratio will also be necessary for lenders. Your DTI is calculated by dividing your gross monthly income by all your monthly debt payments, including your new mortgage payment. Even though many lenders want a DTI ratio of 43% or less, lenders often view 36% as a good DTI ratio.

If your monthly debt payments were $4,300 and your gross monthly income was $10,000, your debt-to-income ratio would be 43% ($4,300 / $10,000 = 0.43, or 43%).

What your lender will need from you when you apply for a 15-year mortgage is shown below as an example:

Pay stubs, federal income tax returns, and evidence of additional income (such as bonuses and commissions) from the previous two years (if you are self-employed, your most recent quarterly or year-to-date profit/loss statement)
Recent two-month bank and investment statements
most recent monthly credit card and loan statements, as well as any other fixed debt commitments, like child support and alimony
The new mortgage’s monthly payment obligation
confirmation of any bankruptcies, foreclosures, or litigation

How To Compare The Rates For Existing 15-Year Mortgages

Compare mortgage offers from many lenders to increase your chances of finding a competitive rate. (The mortgage amortization calculator from Bankrate demonstrates how even seemingly negligible variances in interest rates can result in savings of several thousand dollars.) Think about getting estimates from a bank and an internet lender. Even better, consider working with a mortgage broker. How to begin going is as follows:

Obtain rate quotations from at least three mortgage lenders on the same day, ideally, to ensure that you have a reliable base for comparison and get preapproved. Your credit score, your debt-to-income (DTI) ratio, and other variables, such as the amount of your down payment, are used by lenders to determine your interest rate.
Putting those factors in your favor can help you get the most excellent deal. Borrowers typically receive the most enticing offers when their credit score is at least 740, they make a sizeable down payment of 20% (though this is not needed), and their DTI ratio is at least 43 percent.
APR and interest rate are compared: The loan cost is indicated by the interest rate and annual percentage rate (APR). While the APR includes the interest rate and additional expenses like the origination charge and any points, the interest rate is the price to borrow the money. The APR provides a more thorough cost picture when comparing rate offerings.
Think about the lender’s ratings and your expertise: In addition to the numbers, consider additional elements like ease and the lender’s responsiveness. Consider reading reviews of the lender from other borrowers as well.

How Are Rates on 15-Year Mortgages Calculated?

When determining rates for 15-year mortgages, lenders take a variety of criteria into account. Rates will differ depending on the borrower’s credit history, income, stability of employment, savings, investments, debt obligations, and loan amount.

The status of the economy, inflation, bond market trends, conditions in the housing market, and the lender’s operational costs are just a few examples of the numerous variables outside the lender’s control that significantly impact mortgage rates.

Remember that mortgage interest rates are erratic and subject to sudden changes, so the rates that lenders quote you may fluctuate throughout the day—possibly even the hour.

Frequently Asked Questions

Are 15-Year Mortgage Rates Less Expensive Than 30 Years?

For several reasons, a 15-year fixed-rate mortgage often has an interest rate lower than a 30-year fixed-rate mortgage.

One benefit is that lenders can get their money back in half the time. Additionally, because they are exposed to less risk over a shorter period, they see the 15-year mortgage as more attractive.

Lenders also attempt to consider inflation when determining your rate. They can provide 15-year rates less expensive than 30-year rates since they don’t have to project as far in advance with a 15-year term.

But remember that while a lower rate can be the better choice in the long run, it comes at the expense of more outstanding monthly payments in the short run.

What is a fixed 15-year mortgage?

With a 15-year fixed-rate mortgage, borrowers may expect to pay the same interest rate and monthly payments for the duration of the loan.

Compared to other mortgage options, a 15-year mortgage will save you a lot of money over the long run. However, you will pay more each month than you would on a loan with a more extended repayment period, such as a conventional 30-year mortgage.

How are rates for 15-year mortgages set?

Mortgage lenders base the 15-year interest rates on various variables, but ultimately it is up to the borrower. The lender will consider your credit rating, income, debt, and savings. Your rate will be better the better your credit and financial situation are.

While you have some control over these requirements, external factors like inflation, the economy, and the lender’s overhead also impact mortgage rates.

In general, rates fluctuate a lot, so if you find one you’re happy with, think about getting it locked in so you won’t have to worry about it changing before your loan closes.

Can I change my mortgage from a 30 to a 15-year term?

Through a mortgage refinance, you can change your mortgage from a 30-year to a 15-year one. Refinancing involves replacing your current mortgage with a new one with a new term (duration) and interest rate. This may make sense if you have lived in your house for a while and can now afford a more significant payment. Remember that refinancing will restart the clock on your loan and that closing expenses, which typically range from 3% to 6% of the loan amount, will still be due. That means your total payback period will be 25 years if you refinance into a 15-year loan after paying off your 30-year mortgage for ten years.

Conclusion

If you make all your payments on time, a 15-year mortgage will be paid in full in 15 years. For as long as you own the mortgage, the principal and interest rate are generally fixed with these mortgages. Although your taxes and insurance premiums may fluctuate