Take a look at 15-year mortgage before signing for 30-year version

Pittsburgh mortgage broker Patty Handlovitch said the typical homebuyers she meets with assume they will need a 30-year mortgage because the payments are more affordable — but that’s before she shows them the math and they realize paying off a house in 15 years is generally cheaper overall.

“I price it out, give them both options and let them think about it,” said Ms. Handlovitch, owner of Motto Mortgage in Moon.

The monthly payments on a 30year mortgage are lower, which is what younger buyers usually need — especially if they are juggling student loan payments and other consumer debt on top of housing costs. The lower 30-year payment also allows more flexibility within the budget, which can be handy if homeowners at any stage of life have a change in income or are faced with a financial emergency.

For those who can afford a slightly higher monthly payment, a 15-year mortgage will pay off their home in half the time.

“Plenty of polls show that one of America’s biggest financial dreams — outside of homeownership itself — is to become debtfree. Well, a 15-year mortgage can get you to that goal faster than a 30-year home loan,” said Lynnette Khalfani-Cox, founder of the Houston-based website AskTheMoneyCoach.com.

Mortgage rates have hit record low levels since the Federal Reserve stepped into the bond market in March and began buying fixed assets to boost the economy. In June 2015, the average rate for a 30-year mortgage was 3.98%, and a 15-year mortgage was 3.19% — compared with a 30-year mortgage rate of 3.16% and a 15-year rate of 2.6% in June 2020, according to Freddie Mac.

Interest rates are not expected to jump anytime soon, and the cheaper rates have made 15-year mortgages more affordable than ever.

Matt Frankel, a personal finance expert and mortgage analyst for The Motley Fool, offers a hypothetical comparison of the 15year and 30-year mortgage for a $250,000 home purchased with a 20% down payment.

If the property taxes and homeowners insurance on that property are $300 per month combined, the total monthly payment on a 30-year fixed rate mortgage at an interest rate of 3.13% would be $1,157; on a 15-year mortgage at 2.59%, the payment would be $1,642.

He noted the monthly payments on 15-year mortgages are higher, but the interest rates are lower.

“That’s a 42% increase in exchange for paying off your home twice as rapidly. And you will save nearly $67,000 in interest over the term of your loan,” said Mr. Frankel, a certified financial planner who also writes a column for The Motley Fool, an investment advice company based in Alexandria, Va.

“If your income and other expenses justify doing so, choosing the 15-year mortgage can be an excellent financial move.”

For people worried about their income or anxious about the prospect of having a higher monthly payment, there are other ways to effectively cut down the length of a 30-year mortgage.

You can always send a larger monthly check than the amount that is actually due and ask that the extra money go to the loan principal.

Patrick Boyaggi, CEO of Own Up, a Boston-based mortgage broker, said borrowers who prefer the extra elbow room of having lower payments with a 30-year mortgage can still pay off the loan in half the time by paying extra on the mortgage each month.

“It’s a tough pill to swallow,” he said, “but you know it’s going to a good cause. It gives you the flexibility — if something were to happen — that a 15-year mortgage doesn’t have, and it allows you to pay down the mortgage faster than if you just made the required payments of the 30-year fixed mortgage.”

The only catch with this strategy is you’ll still pay a somewhat higher interest rate on the 30-year mortgage compared with the rate for a 15-year loan.

But accelerating the principal paydown will still have the net effect of decreasing how much money a homeowner will pay in interest over the life of the loan.

“In the first decade or so of a mortgage is when most of the interest is front-loaded,” Ms. Khalfani-Cox said. “So by knocking out that interest, you decrease the length of time you spend paying off the mortgage.”

Leo Loomie is senior vice president of one of the largest independent loan processors for the mortgage industry. He sees thousands of mortgage applications per week, and most are for 30year loans.

“If you ask me why the 30year mortgage is most common, it’s affordability,” said Mr. Loomie, senior vice president at Digital Risk, based in Maitland, Fla. “People want that lower monthly payment. With the lower monthly payment, they can qualify for a more expensive home.

“The lower payment can better accommodate their debt-to-income ratio to qualify for the mortgage,” he said. “But what that ends up meaning is you pay much more interest.”

Sometimes paying off a home as fast as possible is not the main consideration for families. That is why Ms. Handlovitch, at Motto Mortgage, said she listens to what homebuyers tell her about their motivations for buying a home.

“A lot of it depends on how long they plan to be there,” she said. “A 15-year mortgage can help them build equity faster if they plan to move in five to seven years.

“But if they have found their forever home and they are just happy to be where they want to be, they may be buying at a higher price and need the lower payment.

“For them, it might not matter if it takes 30 years to pay the house off because they like the school district and the house fits the lifestyle they want to live,” Ms. Handlovitch said. “Everybody has a different reason for buying. For me, it’s about identifying their top priority.”