Although many homeowners believe the 30-year mortgage is a rite of passage to home ownership, the 15-year mortgage can be a far superior financial product due to economic, legal, and market reason

Economic Reasons

Buying a house using a 15-year mortgage can save a homebuyer over $100,000. Let’s look at a 30-year mortgage on a $200,000 home with a rate of 4.875%. The payment would be about $1058 per month. The same house on a 15-year mortgage with a 4.125% interest rate would have a payment of about $1492.

Although the 15-year borrower is paying $434 more each month, the long-term savings are substantial. In this example, the 30-year borrower will pay back $381,030 as opposed to the 15-year homebuyer’s $268,548. That is a savings of $112,482. And the homeowner owns the house free and clear in half the time!

Legal Reasons

In addition, legal proceedings may cause a mortgage acceleration clause to become enforceable. Although rare, Quicken Loans encourages all homeowners to become familiar with their mortgages.

Some mortgage companies have an acceleration clause, which means the borrower can be required to pay the balance in full if certain conditions occur. For example, homeowners may decide to divorce. If the lender’s acceleration clause includes legal proceedings, the mortgage company can require the mortgagee’s to their loan off.

Market Reasons

Finally, using a 15-year mortgage can also prevent potential homeowners from buying more home than they can afford. Subprime mortgages, in part, contributed to the credit crisis, resulting in a surplus of homes. Lenders had begun assigning more risk to home loans.

The core belief was that the lenders would be covered, since home values had always been increasing. If a borrower defaulted on their loan, the bank could take possession of the home and sell it for a profit. Meanwhile, investors were earning healthy profits on mortgage-backed investments, so the demand for these mortgages securities increased.

However, at a certain point nearly everyone who qualified had a mortgage. This is when lenders assigned risk and actively sought sub-prime mortgages. Not surprisingly, the sub-prime mortgages went into default. Banks assumed ownership of more and more homes. Because there was an overabundance of homes on the market, house values began to plummet. If more homeowners had 15-year mortgages with 20% down payments, many foreclosures might have been avoided.

Now You Know

Several reasons exist for why homeowners may want to consider the 15-year mortgage over the 30-year mortgage. First, 15-year mortgages save money. In addition, they can reduce the hardships that may be be caused by unexpected legal troubles. Finally, the 15-year mortgage helps ensure that the buyer’s home is a blessing, not a curse.