15-Year VA Loans: Pros & Cons

15-Year VA Loans: Pros & Cons

Military borrowers who want to build equity and own their homes faster should consider a 15- or 20-year VA-guaranteed mortgage. For VA-eligible borrowers who qualify, reduced term VA-guaranteed mortgage may be something to consider. With a 15- or 20-year VA-guaranteed loan, military members may pay off their loans in as much as half the time it might take with a 30-year loan. Most 15- or 20-year VA home loans likely have higher monthly payments than 30-year mortgages, but the reward for borrowers is that shorter terms are often accompanied by reduced interest rates.

Pros Cons

Build equity faster

A 15-year fixed-rate mortgage, with its lower interest rate and higher payment amount, builds home equity faster because you pay down the principal balance quicker.

Shorter path to full homeownership

Owning a home free and clear is a goal that burns bright for many people. What matters most to them is a feeling of safety from knowing that their home is fully paid off.

Long-term savings

Lenders are exposed to fewer years of risk on a 15-year mortgage, so they charge a lower interest rate. Half as many years of payment also means you pay half as many years of interest.

Larger monthly payments

Monthly principal and interest payments for a 15-year fixed-rate mortgage run about 50% higher than on a 30-year home loan. You also have to pay property taxes, insurance and, if you put less than 20% down, mortgage insurance. This could make it hard to respond to emergencies and other needs. Even if numbers seem doable now, a mortgage is a commitment. Getting out means selling, refinancing or foreclosure.

Opportunity cost

Using more money for monthly mortgage payments means it’s not available for other investments such as home improvements or capturing an employer’s matching contribution to a retirement account.

Tighter range of home affordability

The higher monthly payments for a 15-year mortgage mean you’ll qualify for a less expensive loan. That might mean buying a smaller house or forgoing your dream neighborhood. Stretching the loan over 30 years and keeping your payments low could give you more choices.

What is a 15-year Mortgage?

A 15-year mortgage will be paid off completely in 15 years if you make all the payments on schedule. These mortgages typically have a fixed rate, which keeps the principal and interest rate the same for as long as you hold the mortgage. Your taxes and insurance costs can change, though.

In 2018, lenders wrote nearly 22 times as many 30-year home purchase mortgages as they did those with 15-year terms, according to NerdWallet analysis of Home Mortgage Disclosure Act data. Among loans for nonmanufactured, single-family homes, 3.6 million were for 30-year terms vs. roughly 165,000 for 15-year terms.

The monthly payment on a 15-year loan is typically much higher than that of a 30-year mortgage.

No doubt many borrowers shy away from these shorter home loans when they learn the monthly payment can be more than 50% higher — around $2,017 a month for a 15-year mortgage vs. $1,318 for a similar 30-year loan, for example.

Is a 15-year Mortgage Right For You?

A 15-year, fixed-rate mortgage is a great tool for borrowers who can afford the higher payments while still saving and investing for retirement. Paying off a mortgage gives many people a feeling of independence, safety and accomplishment.

But if your income is uncertain or variable, avoid the 15-year mortgage. Ask yourself: What would happen if the payments become too much? Do you have a realistic plan to cope, or would you stretch your finances too far?

Potential Alternatives 15-year Mortgage

To get some of the benefits of a 15-year mortgage without the potential liquidity issues associated with a higher monthly payment consider getting the 30-year mortgage and paying it as if it had a 15-year term. Most residential mortgages, including VA loans, do not have a prepayment penalty, so you could pay off the loan sooner and pay less interest over the life of the loan but still have the flexibility to scale back your payments in case of a job loss or cash flow problems.

The downsides to this approach are that it requires more self-discipline to pay extra each month and does not get you the rates associated with a true 15-year mortgage.

What To Do If You Applied for A 15-Year VA Mortgage But Now Regret

You can refinance your VA mortgage using something known as a VA Streamline Refinance loan, which typically is required to provide a tangible benefit for the borrower in the form of lower payments, or a lower interest rate. It can also help those who applied for an Adjustable Rate Mortgage (a VA ARM loan) get out of the adjustable rate loan and into a predictable, fixed-rate VA mortgage.

Your refinance loan options will depend on how long you have been making mortgage payments–in general expect to make a MINIMUM of six payments before you qualify for a refinance loan.

VA Streamline Refinance loans are not the only VA refinance option, but this type of loan has no VA-required new appraisal or new credit check. There is no cash back to the borrower with these loans and you should not expect such. But the benefit of the loan in the form of the lower payments is what borrowers in these specific circumstances need and this is a good option to consider if you feel you made an error in getting a shorter loan term.

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