- 19 Oct, 2023
Comparing 15-Year Fixed Rate Mortgages to Other Mortgage Options: Which is Best?
Find out if a 15-year fixed mortgage is ideal for you
Getting a mortgage requires a thorough understanding of your financial situation, and determining your ability to handle debts. The prime reason is there are plenty of mortgage options out there in the market.
In this blog, we will go through the advantages and disadvantages of choosing a 15-year fixed mortgage, look at available mortgage options, and find out if we are lucky enough to experience the mortgage rates going down.
Keep reading to secure your mortgage with full confidence!
What is a 15-year fixed rate mortgage?
Understanding the basics of a 15-year mortgage is essential. Before jumping into the comparing phase, we will primarily understand what a 15-year fixed rate mortgage does for your financial situation.
A 15-year fixed rate mortgage is a type of mortgage where the interest rates and monthly payments remain the same throughout the 15-year span of the mortgage term. One of the attractive features of a 15-year fixed rate mortgage is the lifespan of the loan.
Compared to other mortgage options, you will complete the repayment faster in 15 years. Hence it is a stand-out choice for many.
Let’s look at some of the common features of a 15-year fixed rate mortgage:
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Fixed rate of interest
In inflation or deflation, your interest rates remain the same throughout the life of the loan. Irrespective of economic or financial conditions, you don’t have to worry about rising interest rates.
Whether you decide to pay off your mortgage in 15 years or you do it earlier, the interest rates on your mortgage will be the same. This helps you predict and budget other expenses effectively after making your monthly payments.
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Manageable loan term
As you are researching about 15-year mortgages, you might have also come across the term 30-year mortgages. Individuals who opt for 30-year mortgages end up dragging their repayment period up to the span of 30 years.
While it is being preferred by some, most individuals taking out a 15-year mortgage will pay it off faster than 30-year mortgages. They get to save a good amount of interest over time and avoid falling into the trap of overpayment.
Alternative mortgage options
While a 15-year fixed mortgage has its own advantages and plus points, it is not the only option available to homebuyers. As we mentioned earlier, there are a lot of options available in the mortgage market.
As individual financial situations change, they can choose from the pool of available options according to their financial background.
Let’s see what other options are available:
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30-year fixed rate mortgage
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Many individuals see this as an affordable option. With the help of a 30-year fixed rate mortgage, homebuyers can have lower monthly payments. This makes it easier for homebuyers from all backgrounds to access the dream of their homes.
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Lower monthly payments ultimately help you manage other expenses and deal with financial priorities. In addition to this, they will also be able to allocate a budget for investments, savings, and other personal financial goals.
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It is important to note that your interest rates will be higher if you opt for a 30-year fixed rate mortgage. But if you can handle higher interest rates and lower monthly payments, going for a 30-year fixed-rate mortgage will help you enjoy homeownership as you repay the loan throughout the span of 30 years.
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Adjustable rate mortgage (ARM)
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Adjustable-rate mortgages, commonly referred to as ARMs, are a type of home loan that has different interest rates. These loans commonly start with a fixed interest rate for a particular period of time and gradually change as the outstanding balance changes periodically.
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ARMs are particularly appealing to those who want to keep their loan for a limited period of time and have the ability to afford increased interest rates.
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This type of home loan is highly adjustable and will have a lower monthly payment to start with. It serves to be an attractive entry for first-time homebuyers or those who are looking for immediate affordability.
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Other Specialized mortgages
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Beyond regular mortgage options such as 15-year and 30-year mortgages, there are other specialized mortgages that cater to the specific needs and circumstances of individuals.
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They are FHA loans, VA loans and refinance options. We will have a brief look into each of these.
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FHA loans are insured by the Federal Housing Administration and issued by banks approved by FHA. They also serve to be an ideal option for first-time home buyers who have lower credit scores up to the minimum average. Additionally, they also have lower down payment requirements.
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VA loan is a program that is specifically designed for the Veterans by the U.S. Department of Veterans Affairs. This program helps veterans, spouses, and active service members to fund their new homes. There are no strict credit requirements, private mortgage insurance, or hefty down payment required.
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Refinancing your 30-year mortgage to a 15-year mortgage is also an option to consider as many individuals can’t withstand 15-year fixed rate mortgages. It is important to note that refinancing your mortgage can affect your interest rates, monthly payments, and overall loan terms.
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Advantages of 15-year fixed mortgage
Let’s explore why residents prefer to go for 15-year fixed mortgages in spite of higher monthly payments.
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Equity build-up
Although the monthly payments are higher, a portion of both the interest and payments goes toward repaying the principal loan amount, leading to accumulating equity quickly.
If you’re an individual who is looking to build equity and use it later for various financial purposes in the future, a 15-year fixed mortgage is a great option.
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Lower interest rates
The rates are affordable and remain fixed throughout the term of the loan. This is highly preferable for individuals who are looking to find affordable options.
This enables homeowners to complete their payments on time and allocate funds for other expenses and investments.
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Interest savings
As you pay lower interest amounts, eventually as time passes, you will save tens of thousands of dollars over the course of 15 years.
It also helps you hit your financial goals sooner compared to 30-year mortgages.
Disadvantages of a 15-year fixed mortgage
Yes, this option sounds appealing. But, we would like you to know about the disadvantages as well in order to make a satisfactory decision.
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Increased monthly payments
As you are paying lower interest rates, it is not a surprise that your monthly payments are higher.
This is one of the most significant drawbacks of 15-year mortgages. Individuals who are dealing with tight budgets find it challenging to handle these monthly payments and hence go for other alternative mortgage options.
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Limited cash flow
If you drain your pockets by allocating funds just for a mortgage, there might be no space for additional expenses, or emergencies. This limits your cash flow and directs you to dip into your savings.
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Risk of foreclosure
Due to the above challenges, you might be at risk of foreclosure. If you are facing financial difficulties, it is recommended that you improve your financial strength before making such mortgage decisions.
Are mortgage rates going down in 2024?
This question is taking over the internet by all the aspiring homeowners, and existing homeowners who are looking to refinance or tap into their home equity.
While it cannot be accurately predicted, we can provide you with certain influencing factors that impact the current mortgage rates.
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Federal Reserve policy affects mortgage rates. When they lower or raise the federal fund rates, they ripple the long-term mortgage rates as well. As a rule of thumb, mortgage rates go up if Fed rates rise.
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Economic conditions and inflation cause the rates to rise or fall. When the economy is doing well and if there is a boom in all the sectors, you can usually expect increased mortgage rates. Whereas if the economy is down, rates tend to decline.
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The housing market situation is another important factor that impacts mortgage rates. A good demand for housing leads to increased loan requests, potentially pushing the rates higher.
These are the prominent factors that heavily influence your answer to the question - “Are mortgage rates going down in 2024?” Consulting with experts to know your answers can help you make better decisions regarding your mortgage application.
Financial or mortgage experts can help you with some predictions that can be used to determine where mortgage rates might be heading in 2023 and 2024.
Comparing all the available options in the mortgage market will give a clear overview of the loan terms, interest rates, and monthly payments required for each mortgage type. There is no fixed answer when it comes to securing a mortgage as a homeowner’s needs and preferences change from time to time with respect to their financial situation.
Your decision to choose the right mortgage must reflect your financial situation and goals. If you would like to gain more awareness for your mortgage related decisions, go through our blogs and gain clarity.
