How Does a Fixed Rate 15-Year Mortgage Work?

This particular mortgage type has a fixed interest rate at the time of closing. This means that the interest rate will never change. Your interest rate stays the same throughout the loan's term. The monthly Principal and interest payment is fixed, which helps you set a firm budget. After 180 monthly payments, your mortgage is paid in full, and you own your home free and clear.

The mortgage costs less than various other mortgage options throughout the loan's life. The interest rates are considerably lower. The loans are settled faster, and the overall interest expense to you is lower.

However, the monthly payments in the case of a 15-year fixed mortgage are comparatively higher than a 30-year fixed-rate conventional loan. This is because repayment terms are longer in the latter case. A 15-year fixed rate mortgage will carry a higher monthly payment but you benefit from lower interest charges, and accelerated repayment of principal loan amount.

Types Of Fixed-Rate 15-Year Mortgage

As a potential home buyer or an existing homeowner who wishes to refinance an existing home loan, you can opt for a 15-year mortgage. Here are a few options or common types of home loans:

• Federal Housing Administration (FHA) Loans: This loan type is offered by the FHA to assist first-time homebuyers from lower- and middle-income households. The outright advantage of FHA loans is that borrowers with lower credit scores can also apply for the loan. The initial down payment is also minimal (3.5% DP). There are no income restrictions when applying for an FHA mortgage loan.
• Veteran Affairs (VA) Loans: This particular loan type is meant for veterans and actively involved service members. It also applies to qualified surviving spouses. The purpose is to make homeownership more accessible to those in service or veterans. VA insured loans allow 100% financing with no money down, there is no monthly mortgage insurance, and exempt veterans have no VA guaranty fee.
• USDA Loans: The program is run by the US Department of Agriculture (USDA). It helps borrowers buy a home in qualifying rural areas. The program is available in over 90% of the United States. USDA mortgages typically offer affordable interest rates, and less expensive mortgage insurance. USDA guaranteed loans allow for 100% financing.
• Conventional Loans: Conventional loans with 15-year terms and low down payments compared to FHA are available, especially for first-time homebuyers. Borrowers in most cases must have a minimum credit score of 620. The down payment has to be 3% of the property's value.

Pros And Cons Of A 15-Year Mortgage

Pros

• Home Equity is Built Faster: With this type of loan, the mortgage is paid off in 15 years. This means that home equity builds at a faster rate than a 30-year mortgage. You can utilize the equity to take funds or draw credit if you need the money to upgrade the place, make home improvements, or renovate it.
• The Total Interest Paid is Less: Since the repayment term is less vis-a-vis a 30-year loan, you pay less interest overall, helping you save money on a long-term basis.
• Be a Homeowner Sooner: With a 30-year mortgage, you get to become the owner of the home after 30 years, which is an extremely long tenure. With a 15-year, you become a homeowner faster as loan tenure is 15 years.

Cons

• Higher Monthly Payments: Higher monthly payments is one of the biggest disadvantages of a 15-year mortgage fixed-rate loan. This is comparatively higher than a 30-year mortgage.
• Less Cash in Hand: Since you are paying higher monthly mortgage payments, you have less cash in your hand.
• Limited Availability: In many cases, lenders are not ready to offer the 15-year fixed-rate mortgage to borrowers. In most cases, it depends on your personal attributes like income, credit score, debt-to-income ratio, etc. If the property is expensive, you may be denied this loan.

Refinancing a 15-Year Mortgage

You can refinance a 15-year mortgage at a fixed rate. However, it will depend on your financial health, goals, and outlook. Keep the following in mind when doing so:

• The Right Time: If you have decided to stay in the home for long, and the interest rates on mortgage loans are dropping faster than ever before, you can consider refinancing. Also, it is a good option if you still have time to close the loan. Do keep in mind the difference between the refinancing costs and the savings you are about to make due to the lower interest rate.
• Low Interest Rates: Refinancing a 15-year mortgage fixed rate can be considered without significantly impacting your monthly payments when interest rates fall or get favorable. This way, you can save on interest payments without straining your budget.
• If You Have an Adjustable-Rate Mortgage (ARM): If you have an ARM, refinancing is a viable option if you get a lower fixed-rate loan. It will help fix your monthly payment and, in so doing, save you money. It will be an attractive option when you have a loan with a variable rate.

Closing Costs

Need funds for closing costs. Remember, you need to pay closing costs when you refinance your loan. The fees you are required to pay depend on the loan size. In most cases, the closing costs will be between 2% and 6% of the loan value. Compare the savings made from refinancing the loan versus the closing costs, and then take a call.

No Interest Saving

If there are zero savings on interest. Compare the interest rate of the current mortgage and that of the 15-year fixed mortgage. If the latter is higher, refinancing is not the best idea.

No Plans to Stay in the Home

If you are not staying in the house, refinancing is not a viable idea. Only if you want to stay in the house for some time then refinance your loan.