Why a 15-year mortgage might be your best bet right now (2024)

Mortgage rates have risen sharply since early 2022, partly due to the Federal Reserve’s rate-hiking campaign to curb inflation. While higher rates have been a welcome change for savers, they’ve made homeownership less affordable.

Higher interest rates increase your monthly mortgage payment and the total interest you pay over time. Of course, the longer your mortgage, the more interest you pay — and vice versa. For this reason, a shorter-term mortgage could be a prudent route when interest rates are higher. What’s more, many lenders are offering lower interest rates on 15-year mortgages than 30-year mortgages right now — all the more reason to consider a 15-year mortgage when you’re shopping around for the best rates.

Why are mortgage rates so high right now?

You can change some factors that affect mortgage rates, such as your credit score, down payment, debt-to-income ratio, and the type of loan you choose. Other factors are out of your control, including:

The Fed has raised the federal funds rate (the overnight rate at which banks borrow money from each other) 10 consecutive times since March 2022 to tamp down on inflation. During that same period, 30-year fixed-rate mortgages increased from about 3.85% to more than 7%, and 15-year fixed-rate mortgages jumped from 3.09% to more than 6%.

What is a 15-year mortgage?

Homebuyers have many options when it comes to financing a home purchase. While most borrowers opt for 30-year fixed-rate mortgages, a 15-year mortgage can save you significant money over the long term.

A 15-year mortgage is a fixed-rate mortgage that you repay over 15 years instead of the more traditional 30-year term. The upside of a 15-year mortgage is that you pay less interest over the life of the loan: They usually have lower interest rates than 30-year loans, and you pay interest for just half the amount of time.

Still, 15-year mortgages have higher monthly payments than loans with longer repayment terms, since you’re repaying a larger portion of the principal each month. Those larger payments can strain your monthly budget and make qualifying for the loan you want harder.

15-year mortgage rates

Of course, mortgage rates vary by lender, so it’s wise to shop around and compare offers from at least three lenders. Pay attention to the annual percentage rate (APR) — not just the interest rate. APR includes your interest rate plus any loan-related fees, such as private mortgage insurance (PMI), mortgage points, and some closing costs. Because APR reflects the true cost of borrowing, it can be a better way to compare loans.

Pros and cons of 15-year mortgages

Every type of mortgage has benefits and drawbacks. Consider the pros and cons before deciding if a 15-year mortgage is right for you.

Pros

You build equity quicker

Home equity is the dollar amount of your home that you own. You build equity faster with a 15-year mortgage vs. a 30-year loan because more of your payment goes toward principal than interest, starting with your first monthly payment. With a 30-year mortgage, the opposite is true (you pay more interest than principal at first), and it can take years to reach the “tipping point.”

You pay less interest

15-year mortgages usually have lower rates than 30-year loans. You also pay less interest over the life of the loan because you borrow the money for half as long.

Consider a $300,000 loan. If you take out a 30-year mortgage at 7.02%, your monthly payment will be $1,999, and you’ll pay a total of $420,790 in interest. With a 15-year mortgage at 6.38%, your monthly payment will be $2,593, and your total interest will be $166,912.

Get rid of private mortgage insurance (PMI) faster

You can get a mortgage with less than a 20% down payment, but you’ll likely pay for mortgage insurance. According to Freddie Mac, you can expect to pay roughly $30 to $70 per month for every $100,000 you borrow. That comes to between $90 and $210 monthly for a $300,000 mortgage.

Once you build 20% equity in your home, you can cancel your PMI and save money. A 15-year mortgage means you’ll reach the 20% equity threshold faster, which means you can drop the PMI sooner.

Cons

Higher monthly payments

You pay off the loan in half the time as a 30-year mortgage, so the monthly payment is higher. With more money going toward your housing costs, responding to a financial emergency could be more challenging.

Tighter homebuying budget

Higher monthly payments mean you’ll qualify for a smaller mortgage, which could limit your choices and prevent you from buying the home you really want.

Opportunity costs

With more cash going toward mortgage payments, you’ll have less money to save, invest, and reach your other financial goals.

15-year vs. 30-year mortgages vs. adjustable-rate mortgages

15-year and 30-year mortgages are fixed-rate loans, meaning you pay the same interest rate throughout the life of the loan. You also have the same monthly payment, which can make budgeting easier.

On the other hand, adjustable-rate mortgages (ARMs) have fluctuating rates that affect your monthly payment and the total interest you pay. ARMs typically have a low introductory rate at first, and then the rate changes periodically based on the market. Since rates can go up or down, your monthly payment can increase or decrease over time — making it tricky to budget.

Can I afford a 15-year mortgage?

A 15-year mortgage might make financial sense if you can comfortably afford the higher monthly payment and want to pay off the loan faster. It can also be a good idea if paying less interest is a priority — and worth the extra strain on your budget. Still, remember that higher monthly payments mean you’ll qualify for a smaller mortgage, so you may have to buy a less expensive home.

Since more of your monthly budget will go toward mortgage payments, having an emergency fund that covers three to six months’ worth of expenses is essential. Add up your monthly costs, including your expected payment on the 15-year mortgage, to ensure you have enough to weather a job loss, surprise expenses, or another unexpected event.

Alternatively, a 30-year mortgage might be better if you want to lock in a smaller monthly payment, even though it means paying more interest. Doing so means you’ll have more money in your budget to spend, save, invest, and handle emergency expenses.

Online mortgage calculators (like this one) let you compare the monthly payment and total interest for a 15-year vs. 30-year mortgage. This can help you decide if you can afford a 15-year mortgage or would be better off with a longer-term loan.

Bottom line

A 15-year mortgage can be an excellent way to save money over the long term, but it does mean higher monthly payments. Consider if you have room in your budget to cover the higher payments comfortably while still saving for retirement and your other financial goals.

Mortgage FAQs

APR, or annual percentage rate, reflects the interest rate plus other loan-related charges and fees, including: Loan origination fees, mortgage broker fees, mortgage insurance premiums, discount points, and some closing costs. For this reason, APR is often a better measure of the true cost of borrowing than the interest rate alone.

Why are mortgage rates high right now?

Housing rates today are higher than they have been in past years largely because of Fed rate hikes over the last two years. The Federal Reserve (aka the "Fed") doesn't set mortgage rates, but its policy decisions influence them. The Fed sets the federal funds rate, the short-term rate at which banks borrow money from each other. When the rate increases, it's more expensive for banks to borrow from other banks and the extra costs can get passed on to consumers — often in the form of higher mortgage rates.

What is a housing market correction, and are we in one?

In recent months, many people have been asking themselves: Will the housing market crash? Or are we just in a housing market correction? A housing market correction and a housing crash aren’t the same thing. With a correction, things are simply coming back into balance. While there’s no official definition for what makes a housing market correction, but most experts say it’s around a 10% drop in home prices. Prices fall, but not by any huge amount. A crash, on the other hand, comes with a more significant decrease — and usually an unexpected one, too.

Fortunately, we’re not currently in a crash-like scenario. A correction, though, might be in the works. Home prices have fallen across 2023, though not significantly. According to Realtor.com, the median home price in June was $445,000, up slightly from May but down nearly 1% since last June. Those falling prices could indicate that the market is correcting — coming down from the soaring highs caused by bargain-basem*nt mortgage rates in 2020 and 2022.

Is now a good time to sell a house?

With mortgage rates high and the housing market likely experiencing a correct, many homeowners have been asking themselves: Should I sell my house now or wait? The best time to sell is typically when buyer demand is high and interest rates and inventory are low. That ideal combination of factors made for a hot selling market in 2021, but conditions have since evolved. Mortgage rates have been on a wild ride in recent months. As of July, the average for a 30-year fixed-rate mortgage is 7.22%, according to Mortgage News Daily. For now, buyers are getting mortgages in the hopes that rates will drop in the next year or two, at which point they can refinance to a lower rate.

But the real answer to the question of whether to sell now or wait may depend on the market conditions in your area. Your real estate agent can help you understand pricing trends in your area, along with available inventory and demand, which can help you decide whether now is the right time for you to sell.

With mortgage rates on a seemingly endless climb, many homebuyers are wondering whether it makes sense to lock in a mortgage rate now. The presumption is that mortgage rates will eventually come down again and homebuyers will be able to refinance. A mortgage rate lock guarantees an interest rate for a specified period, such as 30, 45, or 60 days. If the lender hasn’t processed the loan before the rate lock expires, you can negotiate for an extension or accept the current mortgage rate.

If rates fall below your locked-in rate, you can switch to a lower rate — but only if you have a “float-down” option. Your lender may charge a fee for the option (typically a percentage of your loan amount) and will stipulate when and how you can float the rate down. Rate float-down options aren’t automatic, and not all lenders offer them — so be sure to ask if you’re interested. Otherwise, you can withdraw your current mortgage application and start a new one.

How does a mortgage interest tax deduction work?

Significantly higher mortgage rates are making it more expensive to buy a home. Fortunately, mortgage interest is tax deductible — up to a certain point. It’s called the mortgage interest deduction, and it can allow you to write off both the interest you pay on your monthly payments and at the closing table. in general, mortgage interest is deductible on up to $750,000 in debt (if filing solo or married filing jointly) or $375,000 (if married filing separately).

Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.

This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at lauren.williamson@hearst.com.