Shopping for a mortgage? Here's why a 15-year term is a riskier idea than 30
When you're using a mortgage to buy a home, you'll have to decide what your loan repayment term will be. Most lenders offer a choice of several options, including a 30-year or a 15-year mortgage.
A 15-year mortgage has a lower interest rate, and it costs less over time. Both of these features can make this loan seem attractive to borrowers. Some people are also excited about the idea of becoming debt free in half the time.
But before you opt for a 15-year loan, consider these four big reasons why this may not be the right mortgage for your situation.
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1. There's a huge opportunity cost to tying up your money
When you choose a 15-year mortgage, you commit to making higher payments than with a longer loan term. You're locked into making these payments for the entire life of the loan, which means you're taking on a huge financial commitment for 15 years.
When you've promised so much money each month to your mortgage lender, you can't do other things with it – such as investing. Since mortgage interest rates are pretty low and the return on investment (ROI) you earn by paying off your loan early is simply saved interest, you're accepting a ROI far below what you could probably earn through investing in stocks or ETFs.
Committing to such a big monthly payment could also leave you with less money to pay off high-interest debt or to cover your other living costs, making it more difficult to stay on budget.
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2. Your loan could be more difficult to qualify for
Since a 15-year loan has higher monthly payments, you may have more difficulty qualifying for the loan depending on your financial credentials. You might have to use a lender that allows a higher debt-to-income ratio, rather than being able to choose from a wide array 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 harder to come up with the money during times of financial trouble. As a result, 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 bigger to cover three to six months of costlier mortgage payments.
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4. You give up flexibility needlessly
Finally, the reality is that by committing to a 15-year mortgage, you become locked into paying off your home loan early – even if the payments become too expensive or you decide you'd rather prioritize other things.
If you instead opted for a loan with a longer payoff time, you'd have the option to pay more during months you could afford to do so. If you wanted to repay a 30-year loan in 15-years and were financially able to do so, there'd be nothing to stop you – but you'd have the ability to choose.
For all of these reasons, you should seriously consider steering clear of a 15-year mortgage and opting for a different home loan instead.
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