When you use a mortgage to buy a house, you will have to decide how long your loan will be repaid. Most lenders offer a choice of several options, including a 30-year or 15-year mortgage.
A 15-year mortgage has a lower interest rate and costs less over time. These two features can make this loan attractive to borrowers. Some people are also excited about the idea of getting out of debt in half the time.
But before opting for a 15 year loanconsider these four big reasons why this might not be the right mortgage for you.
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1. There’s a huge opportunity cost to tying up your money
When you choose a 15-year mortgage, you are committing to higher payments than with a longer-term loan. You are obligated to make these payments over the life of the loan, which means you are making a huge financial commitment for 15 years.
When you’ve pledged that much money each month to your mortgage lender, you can’t do anything else with it, like invest. Since mortgage interest rates are quite low and the return on investment (ROI) you earn from prepaying your loan is simply interest savings, you are accepting a much lower return on investment than you would could probably earn by investing in stocks or ETFs.
Committing to such large monthly payments could also leave you with less money to pay off high-interest debt or cover your other living expenses, making it harder to stay on budget.
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2. Your loan might be harder to get
Since a 15-year loan has higher monthly payments, you might have a harder time qualifying for the loan based on your financial credentials. You may need to use a lender that allows a higher rate debt to income ratio, rather than being able to choose from a wide range of different loan providers. This makes it harder to find a loan with the best rates and terms.
3. You could face a higher risk of foreclosure
If you have higher monthly payments to make, it can be more difficult to find the money in times of financial difficulty. Therefore, the risk of foreclosure is greater with a 15-year loan than with longer-term loans with lower required monthly payments.
You can reduce this risk by saving for emergencies, but your emergency fund will need to be larger to cover three to six months of more expensive mortgage payments.
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4. You give up flexibility unnecessarily
Finally, the reality is that by committing to a 15-year mortgage, you find yourself locked into repay your home loan early – even if the payments become too expensive or if you decide to prioritize other things.
If you opted instead for a loan with a longer repayment term, you would have the option of paying more during the months when you could afford it. If you wanted to pay off a 30-year loan in 15 years and you were financially able to do so, nothing would stop you, but you would have the choice.
For all of these reasons, you should seriously consider avoiding a 15-year mortgage and opting for a different home loan instead.
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