15 or 30 Year Mortgage? – Mortgage Advice
As you move on with home purchase plans, you will discover that you have a wealth of choices when it comes to mortgages. Big bank or mortgage broker? Traditional or FHA? And finally, fifteen year or 30 year mortgage? Each has their advantages, and which will work for you will all depend on your personal financial situation.
Money Out of Pocket
A 15 year loan will mean a monthly payment that is hundreds of dollars higher than the one for a 30 year loan. But, you pay less over the life of the loan since the interest rate is lower and the term far shorter. Seems like an easy trade-off, right?
However, there is an opportunity cost that comes with those savings. A mortgage payment that high can prevent you from investing as much in other areas, such as putting money away for a child’s education or funding your retirement.
Also, depending on the interest rate on your loan, you could get a far better return on your money by investing than by paying off your mortgage as quickly as possible. Say, for instance, that you have a 3.5% mortgage rate. Historically, the stock market has grown an average of 10% a year. If a homeowner were to put those few hundred a month extra that a 15 year mortgage costs into investments instead, he or she could come out tens of thousands of dollars ahead by the time a 30 year mortgage was paid off.
Thirty year mortgages offer far more flexibility than 15 year loans. A 30 year loan gives you the freedom to pay it off faster, if you choose, by adding extra payments. If you have a life event such as an illness or job loss that make the higher payments unfeasible, you can simply return to your regular loan payment schedule.
With a 15 year loan, you are committed to higher payments every month. You could, theoretically, refinance the loan if you fall on hard times. But, the sorts of issues that would cause someone to need a lower mortgage payment, such as unemployment, or being financially over-extended, are red flags to lenders, and could prevent you from getting a new loan.
Typically, you will find much lower interest rates on 15 year mortgages than on 30 year loans. This means that, even if you were to make extra payments on a 30 year loan, you will still spend thousands of dollars more over the life of the loan.
We advise those who are shopping for a mortgage to run many different scenarios to determine which loan is best for their needs. Do not just calculate the difference between payments on a 15 and 30 year loan. Consider your total discretionary income, and whether you have adequately prepared for college tuition and retirement. By taking your entire financial future into account when you are choosing a home loan, you can continue the healthy growth that started with the credit repair process.