Is the 15-Year Fixed Really a Solid Choice?

The 15-year fixed mortgage is very alluring. Who doesn’t want to save money, build equity and get out from under a house payment in half the time? But is it all it’s cracked up to be? It depends. If your individual circumstances are favorable, a 15-year fixed could be the best thing you’ve ever done — but if you miscalculate, you could lose everything.

Money Saved on Interest

A 15-year fixed mortgage can save you a great deal of money by eliminating a chunk of interest you would otherwise pay with a traditional 30-year mortgage. Typically, shorter-term mortgages have lower interest rates. For example, a 15-year mortgage usually has a lower interest rate, says nerdwallet.

Shorter payment terms also add up to less in interest due to the way compound interest is calculated. According to Bankrate’s 15-year vs. 30-year mortgage calculator, you can save more than $100,000 in interest on a 15-year $250,000 loan (3.2% interest rate) over a traditional 30-year mortgage (3.8% interest rate).

Short-Term Sacrifices

While you can save a lot of money with a 15-year mortgage, not everything will be rainbows and butterflies. You may have to make some sacrifices to make it work. First, your payment will be higher — approximately $600 more per month in the above scenario. What’s more, you may face a couple of disadvantages come tax time. You can’t deduct as much as you could for a longer loan due to the lower amount of interest paid. Your possible deductions will also dry up after 15 years instead of 30.

Possibility of Disaster

A higher monthly mortgage payment can make it more difficult to save money, invest in your future and absorb unexpected costs or loss of income. This can leave you hanging on the brink of a disaster. A lot of things can happen in 15 years, and if your ability to pay your mortgage payment changes, you may end up struggling unnecessarily. You may even lose your home.

A 15-year fixed mortgage has its advantages and disadvantages, so you need to decide what’s right for you. Make sure you understand the full impact a shorter mortgage may have on your finances, in the short-term and long-term, before making a decision.