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Buying a Home in California With a 15-Year Mortgage: Pros and Cons

Summary: This article explains the pros and cons of using a 15-year fixed-rate mortgage when buying a home in California. In short, you’ll have a larger monthly payment but pay a lot less interest over time, compared to a 30-year loan.

The 15-Year Mortgage: A California Home Loan Option

We hear a lot about the 30-year fixed-rate mortgage in news reports. And there’s a reason for that. It’s the most commonly used home loan option among borrowers in California and nationwide.

But what about the less common 15-year mortgage? Are there times when it makes more sense to use this type of home loan when buying a house in California?

In some cases, it does make more sense to go with the shorter term. In other scenarios, a longer term might be more appropriate for the borrower. It really depends on your priorities, your budget, and your long-term financial goals.

Benefits & Drawbacks of the 15-Year Home Loan

As a borrower, it’s important to understand how a 15-year mortgage loan works, and how it might affect you over time. The “term,” or length, of your home loan basically affects you in three ways:

  • It affects the size of your monthly payments, by either compressing them or spreading them out.
  • It affects the interest rate you receive on your loan.
  • It also affects how much you pay in total interest over the full life of the loan.

Generally speaking, the longer you keep the loan, the more interest you end up paying. On the other hand, California home loans with shorter terms usually have lower total interest costs (but higher monthly payments), even when the amount borrowed is the same.

Let’s examine how each of these factors play out when a person uses a 15-year fixed mortgage to buy a home in California.

Benefit #1: A Lower Interest Rate

If you use a 15-year fixed-rate mortgage to buy a home in California, you will probably end up with a lower interest rate compared to a 30-year loan. Historically speaking, the shorter term loans almost always have a lower average mortgage rate, compared to their 30-year counterparts.

The chart shown above is based on the weekly survey conducted by Freddie Mac. It shows the average rate for 30-year (blue) and 15-year (green) fixed mortgage loans over the past year or so. As you can see, they both follow the same overall pattern of ups and downs. But the 15-year mortgage always has a lower average rate.

Example: When this article was published, in summer 2020, the average rate for a 15-year fixed mortgage in California and nationwide was 2.51%. At that same time, the average interest rate assigned to 30-year fixed home loans was 2.99%. That’s a difference of nearly half a percent.

That difference might not seem like much on paper. But when you project it out over the full term of your loan, the difference would add up to tens of thousands of dollars. Half a percent is a big deal when it comes to long-term mortgage loans.

This is the primary reason why some home buyers in California use 15-year fixed-rate loans. They do it to secure a lower interest rate, and also to pay less interest over time.

Benefit #2: Less Interest Paid Over Time

Using the 15-year mortgage to buy a home in California can actually reduce your total interest costs in two ways:

For one thing, you’ll probably end up securing a lower rate than what you’d get from a 30-year fixed mortgage. We talked about that above.

You’ll also be paying interest for a shorter period of time, thereby reducing your total interest costs — by a lot.

By cutting the mortgage term in half, you’re also reducing the number of payments that will have interest attached to them. So your total costs over the full term of the loan could be significantly less by using a 15-year mortgage.

Drawback: A Larger Monthly Payment

The obvious disadvantage of using a 15-year mortgage loan on a California home purchase is that you’ll end up with a larger monthly payment.

You’ll probably┬ásecure a lower interest rate. But that won’t make up for the fact that you’re cutting the repayment window in half. When you repay a loan over a shorter period of time, you increase the size of the monthly payments.

The larger monthly payments associated with 15-year mortgage loans is a concern for a lot of California home buyers, especially those in pricey real estate markets.

As you can see, it comes down to a matter of priorities. For some home buyers in California, reducing their total interest costs is the number-one priority. For other home buyers, it’s more important to minimize the size of the monthly payment.

In the end, your priorities and financial goals will help you identify the best financing strategy.

Questions? Do you have questions about using a 15-year fixed-rate mortgage to buy a house in California? Want to know what your monthly payments might look like with this financing option? We can help. Please contact our staff with any mortgage-related questions you have!

Mike Trejo

Mike Trejo

Mike Trejo is a Bay Area mortgage broker with 20+ years of knowledge and experience.

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