As you start to shop for a mortgage, you might wonder about the benefits of a 15 year mortgage versus a 30 year mortgage. There are many benefits to a 15 year mortgage. The 15-year mortgage offers you a chance to save thousands of dollars over the life of the loan. This is because the interest rate is typically lower and amortization is half that of the 30-year loan. In other words, the total interest paid on the 15-year note, as compared to a 30-year note, is significantly less because of the shorter borrowing period.
Put another way, a 15-year loan accrues principal much more quickly than a 30-year loan, so you get to own your house in half the time.
That is the good news. The down side to a 15 year mortgage is that because you are building equity faster and paying down the loan sooner, a 15-year mortgage requires higher monthly payments. This will mean that a larger part of your debt to income ratio will be taken up by the significantly higher payments of that 15 year mortgage. With that larger payment, you might not be able to buy an investment property or a bigger car. You should only take a 15 year mortgage if you can handle not only the payments but also the impact on your debt to income ratio. In addition, if you have an emergency or your cash flow changes for a few months, you are absolutely locked in to the big payment.
Alternatively, you might take a 30 year mortgage but pay it on a 15 year basis. That is the best of both worlds. You are paying your mortgage balance down as quickly as if you had a 15 year mortgage but if you need extra cash for an emergency, you are not locked in to that 15 year mortgage payment. You can always pay the 30 year mortgage payment for a month or two until you get past that emergency that required extra money. In addition, if you find some other financial opportunity, such as an investment property, you are able to go for it because your entire debt to income level is not taken up with that 15 year mortgage payment.
Every situtation is different. I refinanced my personal residence last year to take advantage of those historice low rates and went from 30 years to 15 years for several reasons. Since I was midway through a 30 year mortgage, I really didn't want to push out my final payment to 2047! The lower payment even at 15 years was still less than I was paying for my 30 year mortgage and I was able to cut off about 18 months in payments. Since the rate is so low, I was able to add additional principal each month in order to accelerate my final payoff day even sooner. In this case, the 15 year mortgage worked for me, but there were other years that I wouldn't have done it.
Get a lender to help you calculate the overall savings of the 15-year loan versus the 30-year mortgage. In the end, though, base your decision on your circumstances and overall financial plan, such as whether you are nearing retirement age and also will have to shell out college expenses for children, in which case a 15-year loan may not be for you. Remember that your spending habits, budget, and financial goals should all be considered before making a final decision.
Comments(7)