Should you take out a 15-year mortgage now that rates are much higher?

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Short-term loans have their pros and cons.

Key points

  • You will generally get a lower interest rate with a 15-year mortgage than with a longer-term loan.
  • Paying off your house in 15 years also means facing higher monthly payments.

In the middle of 2020, mortgage rates plunged to historic lows, pushing homebuyers to purchase properties at a rapid pace. This surge in demand caused home prices to skyrocket, and they are still high to this day. But unfortunately, so are mortgage rates.

Mortgage rates remained competitive from mid-2020 to early 2022. But over the past six months or so, mortgage rates have been rising at a very rapid pace. And now homebuyers face a double challenge: higher home prices and higher costs to finance the purchase of a home.

That said, there are steps you can take to save money while getting a mortgage. For one thing, increasing your credit score could help you get a lower mortgage interest rate. Indeed, a better score will help your mortgage lender see you as a less risky borrower.

Another option for mortgage savings is to take out a 15-year mortgage instead of a longer-term loan. This will usually result in a lower interest rate than you would get on a 20 or 30 year loan.

But is taking out a 15-year loan a smart move right now? It all depends on your financial situation.

The pros and cons of a 15 year loan

With a 15-year mortgage, you’ll generally end up with a lower borrowing rate, and you’ll also accrue less interest over the course of paying off your home due to this shorter time frame. That’s the advantage.

The downside, however, is that your monthly mortgage payments will be much higher with a 15-year loan. That’s because you pay off your home in half the time of a 30-year loan.

Getting a 15-year loan might be a good idea right now, as it will likely mean a lower interest rate at a time when borrowing has become so expensive. But whether that makes sense to you will really depend on what monthly payments you can afford.

As a general rule, your housing costs, including your mortgage payment, property taxes, home insurance and homeowners association fees, if applicable, should not exceed 30% of your take home pay. If you can make payments on a 15-year mortgage while staying within that limit and without stressing yourself financially, then by all means, take out a shorter-term mortgage and reap the savings involved.

But if you can’t easily swing those higher monthly payments, do yourself a favor and go for a longer-term loan. It’s not worth getting a 15-year mortgage that saves you on interest, but puts you at risk of falling behind on your payments.

Make the right call

These days, taking out a 15-year loan can be tempting. But you’ll have to be honest with yourself to find out if you can really afford those higher monthly payments. Otherwise, get a 30-year loan and do your best to keep your credit score in good shape. That way, if mortgage rates drop over time, you may be able to refinance into a new home loan at a much better rate than you can get today.

The Best Mortgage Lender in Ascent in 2022

Mortgage rates are rising – and fast. But they are still relatively low by historical standards. So if you want to take advantage of rates before they get too high, you’ll want to find a lender who can help you get the best rate possible.

This is where Better Mortgage comes in.

You can get pre-approved in as little as 3 minutes, without a credit check, and lock in your rate at any time. Another plus? They do not charge origination or lender fees (which can reach 2% of the loan amount for some lenders).

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