15-Year Fixed loans are by default better loans if you want to save money over the long run or want to own your home “free and clear” sooner.
In a nutshell…
A 15-Year Fixed rate loan has a much shorter term than 30 Year Fixed loans and ARMs. They typically feature:
- Lower interest rates
- Aggressive paydown of your principal (so you can be free & clear on your home sooner or gain way more equity by the time you want to sell your home if it’s before 15 years are up)
- Higher monthly principal + interest payments, since you’re paying off the loan quicker
Who should consider a 15-Year Fixed Loan?
You have room in your monthly budget and want to gain equity in your home more quickly. You can save money in interest over the duration of the loan.
For example, for a $200,000 loan at 3.5000% rate, if you follow a 30-Year Fixed schedule, you will have paid a total amount of interest of $123,312 at the end of the 30 years. You only pay $898 per month in the meantime.
However, if you opt for a 15-Year Fixed loan at the same rate of 3.500% (in reality, the rate is typically lower on a 15-Year Fixed compared to a 30-Year Fixed), you will only have paid $57,358 in interest by the time you are done in 15 years. This requires you to pay $1430 per month, but you’ll have saved $65,954 total! That would just cover 4 years of Undergraduate Studies at UC Davis In-State tuition for the school year 2016-2017, according to the UC Davis website.
Keep in mind that, since you’ll be paying less in interest, you won’t be able to write off as much mortgage interest when filing your taxes, but we’ll save that math for another day. You can read up on it more in our the blog post Mortgage Refi Tax Deductions: Your Complete 2017 Guide or, if you’re feeling particularly on top of things today, the IRS website.