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15-year mortgages become more popular

There’s been a spike in interest recently in 15-year mortgages, particularly for people who are refinancing.

In general, the recent financial crisis has made people more wary of debt and more eager to pay it off. Back before the crisis, many people were happy to take on more debt and pay it off over a longer period of time. But today, a lot of people want to get rid of debt as quickly as possible, even if it means higher monthly payments.

Between 2007 and 2009, the percentage of people refinancing who opted for a 15-year mortgage doubled – from 9 percent to 18 percent.

Another reason for the change is that interest rates have been so low. When interest rates are low, the difference between payments on a 15-year mortgage and a 30-year mortgage is not as great as it otherwise would be, so more people can afford the shorter term.

So…should you opt for a shorter mortgage?

The advantages are (1) you can pay off your mortgage a lot faster and (2) you can save an enormous amount of interest over the life of the loan.

A 15-year mortgage can also act as a forced savings vehicle. Some people like the idea that they “automatically” put money into savings each month, and aren’t tempted to spend it on other things.

However, a shorter loan is definitely not for everyone. Because the monthly payments are higher, it works best for borrowers who have established careers and who already have considerable equity in their homes.

How much higher are the payments? On a $200,000 loan for 30 years at 5 percent, you could expect to pay about $1,075 a month. But with a 15-year loan, you could expect to pay about $1,580 a month.

As a general rule, most people shouldn’t consider a 15-year loan unless they have considerable savings set aside for emergencies, and unless their total monthly debt payments (including mortgage, taxes, insurance, condo fees, car payments, student loan payments, and credit card debt) are no more than 35 percent of their income.

What if you want to pay off your loan more quickly, and you want to save on interest costs, but you don’t want to commit to a higher payment each month for many years?

There is a good alternative. You can simply take out a longer loan, but make extra payments each month toward the principal. That will accomplish your goals, without tying you down if money becomes tight at some point in the future.

If you have a 30-year loan of $200,000 and a 4.5 percent rate, and you pay just $100 extra each month toward reducing the principal, you’ll pay off the loan five years early and save $31,700 in interest over the life of the loan. Plus, you’ll have the flexibility to skip the extra $100 payment in a given month if you need it for other things.

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