Mortgage Length: Should You Keep It Short?


Growing numbers of homeowners are choosing 15-year mortgages when they refinance, but is that really the best option?

In the first six months of the year, 26% of homeowners who refinanced picked the 15-year deal over the more common 30-year mortgage, up from 18.5% in 2009, according to CoreLogic, a market-data firm.

Choosing a 15-year loan for a refinancing can save the homeowner money in three ways: the interest rate is lower than the rate on the loan being replaced, it’s lower than the rate on a new 30-year loan, and choosing a 15-year term instead of 30 eliminates 15 years of interest payments.

It sounds like a strategy that can’t miss.

But there is one drawback: Since the debt has to be repaid in 15 years instead of 30, the principal payments are much, much higher. For many, it might be better to take out a new 30-year loan, and then try to pay extra every month to retire the debt ahead of schedule. That way, the homeowner isn’t committed to the bigger payment required by the 15-year loan.

The average 15-year fixed-rate loan charges 4.072%, compared to 4.532% on the 30-year fixed deal, according to the BankingMyWay survey. For every $100,000 borrowed, the 15-year loan would cost $743 per month, according to the Mortgage Loan Calculator. The 30-year loan would cost just $509.

A homeowner able to shoulder the bigger payment would reap big savings, paying $33,794 in interest during the 15 years compared to $83,091 in interest over the life of the 30-year loan.

But what if the bigger payment will be a strain? Suppose your income falls or other expenses rise more than you expect. If the big payment makes you nervous, consider refinancing with a 30-year loan and making extra payments.

Going further, if you took out the 30-year loan and paid an extra $234.71 a month, your monthly cost would be same as with the 15-year deal, and the loan would be paid off in 16 years. Over the life of the loan, you’d pay $39,872 in interest, about $43,000 less than if you made only the required payments on the 30-year loan for three decades.

With this 30-year prepay option, you’d pay about $6,000 more in interest than with the 15-year loan, a result of the slightly higher interest rate. But that might seem like a small price to pay for the flexibility you’d enjoy – the right to pay $509, instead of $743.

That would come in handy if money were tight, or if you saw a more profitable way to invest that $235 a month.

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