What are the Benefits of a 15 Year Fixed-Rate Mortgage?

By in Spend

Money magazine’s recent article, Find a Mortgage Tailor-Made for You mentions a 15 year fixed-rate mortgage will help you build equity faster.  Dave Ramsey is probably the person I most often hear encouraging people to get a 15 year mortgage versus the more common 3o year.  Apparently, fixed-rate mortgages, in general, are becoming more popular.

Nowadays, with banks scared of getting burned by exotic mortgages and home buyers seeking predictability, fixed-rate loans make up about 95% of purchase and refinance mortgages, up from 68% in 2006, according to Freddie Mac.

So, why does Dave Ramsey and Money magazine highlight the 15 year fixed-rate mortgage?  Building more equity and faster is certainly a great thing and the thought of being completely out of debt sooner (yes, the mortgage too) sounds even better to me.  Another common reason is that historically rates on 15-year mortgages are lower.

Rates on conforming 15 year mortgages (below $417,000 in most areas) are just 4.54% vs. 5.17% for 30-year fixed.

With these benefits, it leads one to start considering a 15 year versus the 30 year when purchasing a new home, or refinancing.  But, not so fast.  There are a few things you need to keep in mind first.

You’ll pay $2,301 on a $300,000 loan vs. $1,642 for a 30-year.  So it makes sense only if you’re sure you can commit to the higher payment every month and you’re already maxing out your tax-advantaged retirement accounts.

Higher payments

15 Year Fixed-Rate MortgageCertainly, you’d want to make sure you could afford the payments by making a close evaluation of your spending plan or monthly budget.  Dave Ramsey says your house payment shouldn’t be more than 25% of your take home pay.  As yourself if you’ll break that rule of thumb if with the 15 year mortgage.  If so, other areas of monthly spending may suffer.

Retirement Contributions and Savings

Less, obvious, but sensible advice is making sure you’re maxing out your retirement contributions before making the move.  Otherwise, you could lose out on years of investing until you either increase income or pay off your home if you use your extra money to pay the 15 year fixed-rate mortgage monthly payment.

Probably even more important advice is to make sure you have adequate money saved in a emergency fund first.  It would be terrible to have too much mortgage payment and not be able to save for emergencies which occur for everyone.  The same advice goes with interrupting your debt pay off plan with the 15 year mortgage.

Dave Ramsey’s Baby Step 6

Overall, keep in mind paying off your home early isn’t until Baby Step 6, so it’s not wort the mentioned sacrifices in savings, investing or debt pay off, in my opinion.  But, the 15 year mortgage, and all it’s great benefits, may be worth decreasing your standard of living to afford the payments.

An Alternative Plan

So if you’re convinced you shouldn’t make the move just yet, one last option discussed in the Money article is taking out a 30 year fixed-rate and paying extra whenever you can.  But again, keep Baby Step 6 in mind.  If you’re on step 6, the savings in interest can be considerable as you work to pay off your mortagage. 

If you put an additional $200 a month toward that $300,000 loan starting at year five, you’ll reduce your payoff time by five years and save nearly $48,000 in interest.

What are your thoughts and experiences with the 15 year fixed-rate mortgage? 

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About Jason

Jason started blogging in 2009 when he created One Money Design. Since then it has grown into a group of writers with unique personalities and a common goal of helping people on the journey to true financial freedom. Jason is an IT project manager by day, but you’ll find him blogging about personal finance and exploring web entrepreneurship late at night and the early hours of the morning. He’s also actively involved in a financial coaching ministry in his community where he shares principles of biblical stewardship and helps people learn to manage their money wisely. Jason enjoys spending time with his wonderful wife and two awesome children and lives in north Dallas. Twitter | Facebook | +Jason Price
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  • http://www.joetaxpayer.com JoeTaxpayer

    When rates are so low, the difference between the 15 year and 30 year payment becomes pretty dramatic as you pointed out.
    To stay to any income ratio, the 15 year mortgage leads to a 1/3 or so smaller house. In a perfect world, where all choices are available and one can buy such a house in the neighborhood they desire, I’d say go for it. But right now, incomes, median homes, etc line up to point toward 30.

    The 15 yr should be considered only if the borrower carries no other debt, is max’ing out their retirement accounts, and has a full-up emergency fund.

    Me? I started at 30. Each refinance lowered rate and pulled in payoff, at no point/no closing. Last refinance was two months back, 10yrs, 4.99%. Making the payments as though it were 7yrs 3 months, to coincide with the kid going to college.
    The first 6 house years, we had a nanny, and it would have been tough to pay that salary and accelerate the mortgage as well. Mortgage will be done about 20 years after we first bought the house.

    All in all, it’s less about “you can beat the return after taxes (by borrowing at 5% and investing long term)” and more about the flexibility. There is a growing anti-det mantra, which creates risk for those who lose their job, but have little liquidity.

    • http://www.onemoneydesign.com Jason Price

      Joe, thanks for sharing your wisdom. I do like your approach as you’ve been working on that mortgage for a while with your refinancing and pulling in the payoff. Interesting point about 1/3 or so smaller house. That seems about right and makes sense. I guess you have to weigh that with the anti-debt mantra which I do like. But many other factors are involved and it needs a family discussion too. :) You don’t want to buy 1/3 smaller just for the pay off but put your family in an unsafe neighborhood or in schools that aren’t very good.

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  • http://www.churchfinancing.biz Church Mortgage

    The best overall plan is to take out a 30 year mortgage and then make the higher payment associated with a 15 year mortgage and it will pay off in 15 years. If you find the higher payment is difficult you can always drop back to the 30 year payment.

  • http://home-loan-mortgages.blogspot.com/ Finwell Goldberg

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  • http://www.getamortgagewithbadcredit.org Ricardo

    15 years mortgage is almost always better option, I think.
    Ricardo recently posted..Is it possible to get a mortgage with bad creditMy Profile

  • http://www.gmacmortgage.com/ Gmac

    The 15 year mortgage would be the better choice but it will require a lot of discipline, budgeting and planning. However the advantage is that you will be building equity fast.

  • http://www.fixedrates.info J. Schneider

    No doubt paying off in 15 with a fixed rate loan is best. Seriously, take the income you have monthly and budget to a level where it makes sense to get out of a 30 and into a 15. Sooner the better, just imagine on average that 1K mortgage for some Americans goes away. That’s a lot of savings for retirement!