Of all of the loans issued today in the United States, the vast majority are conforming loans, meaning they adhere to specific guidelines set forth by the lending industry. Additionally, most conforming loans are written for 30-year terms. However, as competition between mortgage lenders has increased in the last few decades, lenders have begun introducing additional mortgage products and marketing them to buyers looking for financial savings and other benefits. As a result, an increasing number of mortgages today are written for 15-year terms. These loans have several advantages to borrowers who can qualify and are well worth exploring if you're in the market for a new mortgage.
Definition
Conforming loans are those that adhere to certain specific limits and criteria established by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, more commonly known as Fannie Mae and Freddie Mac. These government-sponsored corporations specialize in overseeing the funds that are available in the mortgage industry, ensuring home buyers a continuous flow of mortgage-related financing. And they also set limits for several loan factors, including down payment, credit and income requirements, and maximum loan amount. Each year, these limits may rise or fall, based on the economy and the housing market. Loans that do not adhere to these limits are called non-conforming loans.
Pay off Mortgage Sooner
Many people consider their mortgage their biggest monthly financial headache. By opting for a 15-year mortgage, you pay off the loan in half the time of a traditional 30-year loan, resulting in more free cash each month as well as the significant peace of mind that comes from knowing you own your home free and clear. Paying off a mortgage early also means you'll have cash available for college, investments, retirement or other expenses.
Less Interest
Interest is calculated over the life of your loan, and each monthly payment comprises both principal and interest. By reducing the number of monthly payments required to pay off the loan by half, borrowers save considerable interest. For a 15-year fixed-rate $200,000 loan with an interest rate of 5 percent, a borrower would pay $103,789 in interest, while a 30-year loan with the same interest rate would result in $231,677 in interest paid--well over twice the amount.
Faster Equity Boost
By paying off your mortgage in half the time of a traditional 30-year loan, you build up equity twice as fast--actually even faster because more of each payment on a 15-year loan is applied to the principal, meaning the difference between the value of your home and the amount you owe--your equity--grows faster than it does with a mortgage that involves a longer term.
Lower Interest Rate
Because banks get their money in half the time, they generally consider 15-year mortgages to be less risky than 30-year mortgages. As a result, the interest rates charged on 15-year mortgages tend to be lower than those for 30-year mortgages. A lower interest rate results in additional savings over the life of the loan, adding up to thousands or even tens of thousands of dollars in savings for some loans.
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