This is why Clark Howard is obsessed with 15 year mortgages

One of the oldest debates about mortgages is whether you should take out a 15-year mortgage or a 30-year mortgage.While new homeowners may not have much say in the matter due to the 30-year mortgage’s lower monthly payments, now might be a good time for some homeowners to take out 15-year mortgages.

Clark Howard recommends the 15-year mortgage for anyone who can get it. You’ll pay less interest in the long run, even if you have to contend with higher monthly payments in the present. However, there is a unique set-up for recent homeowners that can make refinancing into a 15-year mortgage a brilliant move.

New Homeowners Have Historically High Interest Rates

Homeowners who bought their homes 1-3 years ago likely have elevated interest rates compared to their peers. The Federal Reserve raised rates many times to combat inflation, and that left many home buyers with high mortgage payments.

30-year fixed mortgage rates peaked in November 2023, almost touching 8% in the process. However, there has been a steady decline ever since, and it can pick up more momentum. Soft inflation readings can prompt the Federal Reserve to cut rates, and decreased government spending will also contribute to lower rates. That’s because the government won’t have to issue as many bonds and can finally make progress toward paying off its gigantic debt.

Refinancing your mortgage can help you secure a lower rate if you bought near the top. While you can choose a 30-year mortgage, Howard outlines a few reasons why the 15-year mortgage may be a better choice.

You Have Experience Paying Off the Mortgage

Homeowners have been keeping up with their 30-year mortgages for a few years. While it may have seemed new and scary when they first bought a house, they now know what to expect. Some homeowners may opt to refinance into a 30-year mortgage to reduce expenses if they are having a hard time keeping up with mortgage payments.

However, homeowners who continue to keep up with their mortgages may want to give the 15-year mortgage more attention. Yes, you’ll have to pay more each month, but you will get out of debt sooner. It’s especially useful to get out of debt with a primary residence. On the other hand, real estate investors will likely keep their 30-year mortgages to preserve their cash flow.

15-Year Mortgage Rates Are Lower

You may not end up paying as much extra as you think because of the 15-year mortgage rates. Refinancing a 30-year mortgage into another 30-year mortgage will result in a lower rate for homeowners who bought at the high. However, you can get an even lower rate with a 15-year mortgage.

Howard said that you typically end up with a rate that is 0.6% lower than the 30-year mortgage rate. While that’s a good rule of thumb, the gap is currently bigger. Data on 15-year mortgage rates from the St. Louis Fed shows a gap of more than 0.8% between a 15-year rate and a 30-year rate.

Mortgage rates have been dropping since the start of the year, and if that trend continues, housing will continue to become more affordable. The higher monthly mortgage payments may be reasonable based on your rate and the current rate. Then, instead of being out of debt in almost 30 years, you only have to make monthly mortgage payments for 15 years.

It’s important to review your finances and gauge if you can keep up with the monthly payments on a 15-year mortgage plus your other obligations. Clark Howard’s advice can help homeowners get out of debt sooner just by paying a little extra each month.

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