What is a 15-year Fixed-Rate Mortgage?
If you are a homebuyer and are frustrated by the thought of waiting 30 years to pay off your mortgage, or are looking for a potentially lower interest rate, a 15-year Fixed-Rate loan might be the right choice for you. A 15-year Fixed-Rate mortgage is a type of home loan that will take 15 years to pay back and has a fixed interest rate and monthly payments. Some homebuyers prefer a 15-year Fixed mortgage because it will take them half as long to pay it back than the most common alternative, the 30-Year Fixed-Rate mortgage.
A 15-year loan and the 30-year loan have similarities in terms of lender requirements and eligibility. Both options are available for Conventional loans, refinancing, and government-backed loans like FHA and VA.
15-year Fixed-Rate Mortgage Overview
A mortgage rate is the interest rate you pay on your mortgage loan. Mortgage rates change daily and are based on fluctuations in the market. A 15-year Fixed-Rate mortgage is a loan featuring an interest rate that stays the same over the life of the loan. This is different from an Adjustable-Rate mortgage (ARM), which has an interest rate that can periodically adjust based on the terms of the loan.
A 15-year Fixed loan allows a borrower to make stable payments on their principal (the original borrowed amount) over a 15-year term. They are often used by borrowers seeking to buy a house or refinance a home loan. This is because they offer the stability of an unchanged monthly payment, regardless of changes in the market.
With a 15-year Fixed-Rate loan, your mortgage payment will be the same every month. This fixed payment does not include other payments like property taxes, homeowners’ insurance, or homeowner association fees. Having a fixed-rate mortgage gives you more stability in your budget so you can plan your finances accordingly. You also don’t have to worry about your payment going up if the housing market changes.
You can use our Fixed-Rate mortgage calculator to calculate your estimated mortgage payment.
How Does 15-Year Fixed Mortgage Work?
A 15-year mortgage works like most home loans. Once you have determined your homeownership goals and personal finance options, you’ll start researching which mortgage will suit your needs. Fixed-Rate Mortgages can be beneficial for people who prefer simpler budgeting and want a stable payment and predictable expense.
You and your lender will agree on a set of stated terms and conditions for your individual loan. These include your monthly payment amount, the interest rate of your loan, and other logistical guidelines. The terms and conditions of your loan depend on several applicable factors. These can include, your credit score, your current debt-to-income ratio (DTI), your monthly income, and the current housing market.
DTI is the total sum of the monthly payments you make towards your current debt divided by your monthly income. This debt can include credit accounts, student loans, car notes, or other personal loans. Lower DTI and higher credit scores signal to your lender that you are more likely to pay off the entirety of your home loan. That is why having a higher credit score and lower DTI can sometimes get you lower rates on your loan.
For a 15-year Fixed-Rate mortgage, these terms and conditions won’t change over the life of the loan. The monthly payments you make at the beginning of the loan will be the same as the ones you’re making at the end of it. This is regardless of related changes in market conditions.
15-Year Fixed Mortgage Benefits
15-year Fixed mortgages have their own unique set of benefits.
- Lower interest rates: Interest rates on loans are calculated by mortgage lenders based on the size of the loan and the amount of perceived risk. Lenders are exposed to fewer years of risk when they give you a 15-year Fixed Mortgage. This allows them to charge a lower interest rate. Also, since you’re paying the interest over half as many years, compared to a traditional 30-year Mortgage, you’ll pay less total interest over the life of the loan. Use the mortgage calculator on the New American Funding website to estimate the mortgage costs for a 15-year Fixed loan.
- Save money: Since a 15-year Mortgage is over a shorter period of time, you will pay less interest over the life the loan. This means your loan will cost you less overall, allowing you to save more money in the long run.
- Own your home faster: The faster you are able to pay off your mortgage, the faster you will be able to fully own your home. Getting a 15-year mortgage cuts that time in half compared to a traditional 30-year mortgage. This means you’ll achieve full ownership of your house in half the time.
- Build equity faster: A 15-year mortgage can potentially help you build equity in your home faster than a traditional 30-year mortgage. This is because you are paying down the principal balance quicker.
- Have your mortgage paid off by the time you've retired
15-year Fixed-Rate Mortgage Requirements
Those applying for a 15-year fixed or 30-year mortgage will first be required to be pre-approved.
Getting credit pre-approval allows you to:
- Save time by only looking for properties that fall in your price range
- Build credibility with sellers by demonstrating you are serious about buying and are qualified to do so
- Get faster funding for your loan by accelerating the closing process
- Have a better homebuying experience
Here are the other general requirements to qualify for a 15-year mortgage after you get pre-approved.
- A minimum credit score of 580 to 620: Having a good credit score is the main way borrowers are able to qualify for the lowest mortgage rates. Lenders generally consider a good credit score to be between 670 and 739. A credit score of 620 is the minimum required to qualify for a standard Conventional loan. Some lenders may accept as low a score as 500 for other 15-year mortgages such as FHA.
- A maximum debt-to-income ratio of 50%: Having a low DTI is also important in finding low mortgage rates. Examples of debt included in your DTI are credit cards, business loans, and other personal loans. If your DTI exceeds 43%, it could be difficult to qualify for a mortgage.
- The ability to pay at least a 3% down payment: The exact amount of down payment required will depend on the loan type and the terms and conditions of your individual loan.
Each mortgage lender has their own individual qualification standards when issuing a loan. Make sure to check with your lender to find out the specific requirements of your loan.
If you're looking to refinance your mortgage with a Fixed-Rate loan you will need these things in addition to the previous requirements.
- Proof of Income: Show evidence of steady and consistent income – this can include W2s, tax statements, or check stubs
- Asset Information: Bank account statements, 401k, and other investment records to show any additional income and assets
- Homeowners Insurance: Be able to prove to your lender that you have the necessary coverage for your property
In addition to general requirements, your lender will also have their own individual set of qualifications.
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How Do I Qualify for a 15-Year Fixed?
Qualifying for a 15-year Fixed mortgage is like qualifying for any other loan. You will need a good credit score and low DTI. Each loan type and lender have different applicable requirements to qualify. For instance, an FHA 15-year Fixed mortgage will have lower credit score requirements than a Conventional one.
The qualifications for a 15-Year Fixed-Rate mortgage are basically the same as a 30-year mortgage. It depends on the borrower's credit history, income, and more. The main difference is that the monthly payments on a 15-year mortgage will likely be higher than they would be for a 30-year mortgage. As a result, a borrower will be required to have enough income or assets to cover those higher payments each month.
A good place to start is by getting pre-approved for the loan. This allows the borrower to know how much they can afford to spend on a home, speeds up the loan process, and allows sellers to know they are searching with intent.
15-Year Fixed Loan Options
Conventional 15-Year Fixed-Rate Mortgage: A Conventional loan is not insured or guaranteed by the government. This means it has fewer restrictions and allows lenders some flexibility in the terms and conditions they set for their borrowers. Conventional loans typically require a down payment of as little as 3% of the total cost of the home.
Lenders can offer flexible term lengths on Conventional loans, ranging from 10 to 30 years. Since lenders are at a higher risk with a Conventional loan, the borrower may be required to secure private mortgage insurance (PMI) if they have a down payment of less than 20%.
PMI will no longer be required once a borrower reaches 20% equity in the home.
FHA 15-Year Fixed-Rate Mortgage: An FHA loan is a mortgage insured by the Federal Housing Administration. The FHA is a federal government agency that is part of the Department of Housing and Urban Development. FHA loans are backed by a guarantee from the federal government and are often a valuable option for homebuyers who do not qualify for a Conventional loan.
FHA loan requirements vary depending on individual loan types but require as little as 3.5% down payment on a home purchase. FHA loans may be a valuable option for first-time homebuyers, buyers with a lower credit score, or a challenging credit history.
One thing to consider: FHA loans require both an upfront payment for mortgage insurance and separate monthly mortgage insurance payments for as long as the life of the loan, depending on the loan-to-value ratio. FHA loan limits also vary by location.
VA 15-Year Fixed-Rate Mortgage: A VA loan is a mortgage guaranteed by the Department of Veterans Affairs. VA loans are exclusively for active-duty military personnel, veteran servicemembers, and certain military spouses. VA loans carry significant benefits for those that qualify, including lower interest rates, no required down payment, and no monthly mortgage insurance premiums.
15-Year Fixed-Rate Refinance: A Refinance loan is a loan that replaces an existing mortgage. The borrower will choose a new loan, in this case a 15-year Fixed-Rate mortgage and use it to pay off the existing debt. The new loan will have new terms and conditions including new interest rates, monthly payments, and a new time frame for repayment. Refinancing can be particularly beneficial if the current housing market rates have decreased since your original loan agreement. Many people refinance when they can lower their monthly payments or shorten the duration of their loan. For instance, refinancing from a 30-year loan to a 15-year loan would mean the borrower could potentially have their house paid off sooner.
For more information and to get answers to your questions contact one of the licensed loan officers at New American Funding. They will help you figure out which loan is right for you.
Pros and Cons Of 15-Year Fixed
15-year Fixed-Rate Mortgages are often popular because of their shorter payback period and potential for lower interest rates. They give borrowers the opportunity to gain full ownership in their home faster and to increase their equity quickly. They also will also let you save more money overall since you won’t be paying as much total interest as with a 30-year Mortgage.
The major factor to be aware of with 15-year fixed mortgages are the higher monthly mortgage payments. For example, with a 30-year fixed mortgage of $300,000 having an interest rate of 3.75%, if you were to put down 20% of the property’s value, your mortgage payments would total just over $1,100 per month, before taxes and mortgage insurance payments.
A 15-year fixed loan with a 3% interest rate, on the other hand, would have monthly payments of about $1,600.
Comparing 15-year Fixed and 30-year Fixed-Rate Mortgages
The main functional difference in a 30-year Fixed and a 15-year Fixed is the duration. The length of the loan, however, can in turn, affect things like the affordability of it. 30-year Fixed-Rate mortgages are popular with new homeowners because they have lower monthly payments and make it simpler for borrowers to plan their finances.
15-year Fixed-Rate loans can help you build equity in your home faster and have lower interest rates. However, the monthly payments are likely to be higher than with a 30-year, so it requires a higher degree of financial stability. This may limit the availability of the loan to some borrowers. The higher monthly payments can also make it more difficult for borrowers to save money while they are paying off their loan.
How to Refinance into a 15-year Mortgage
Many people choose to refinance their current mortgage. Particularly if refinancing can lower their monthly payments or shorten their term of repayment. If the conditions are right, refinancing to a 15-year mortgage may be able to do both.
Whenever you refinance a mortgage, you replace the mortgage you have with a newly negotiated loan. This means that the terms and conditions of your loan are likely to change. For instance, refinancing from a 30-year loan to a 15-year one could help you pay off your home faster and potentially save money in interest. Some borrowers decide to refinance to take advantage of lower interest rates in the market. However, refinancing could also increase your monthly payments since it shortens the duration of the overall repayment period.
In order to refinance your loan, you must go through a similar process to your original loan application and approval. This includes checking your financial situation, figuring out your individual needs, contacting a lender, and going through the application process. Each lender will have their own requirements and applicable qualifications for eligibility. General requirements will include a good credit score, a low DTI, and steady monthly income.
If you are interested in refinancing your current mortgage to a 15-year mortgage, talk to your New American Funding loan officer today.
What are the Current 15-year Mortgage Rates?
A mortgage rate is the interest rate you pay on your mortgage loan. Mortgage rates change daily and are based on fluctuations in the market, but they're lower than they have been for most of the last 40 years. Mortgage rates have changed significantly over the years. From the 1970s to 1981 mortgage rates increased to as high as 18%. The Federal Reserve then raised the Federal Funds rate to help manage inflation. From the 1980s until 2022, rates declined steadily.
Visit the mortgage rate tracker from New American Funding to learn what the current 15-year Fixed mortgage rate is.
Who is a 15-year Mortgage best for?
A 15-year Mortgage can be a beneficial resource for borrowers who do not have any concerns about having a somewhat higher monthly mortgage payment and who want to pay off their home sooner.
Is it better to get a 30-year loan and pay it off in 15 years?
Whether or not it is better to get a 30-year loan and pay it off in 15 years depends on your individual circumstances and the terms and conditions of your loan. Things to consider would be your monthly income, your budget, and whether or not your loan terms include a prepayment penalty.
Your individual lender or banker can help you understand the products offered and find the right loan option for your needs.
What are the disadvantages of a 15-year mortgage?
Compared to 30-year Fixed-Rate Mortgages, 15-year Fixed-Rate Mortgages have lower interest rates but higher monthly payments. With higher monthly payments, a borrower may have reduced cash flow for other things like investing.