There are several reasons why a thirty-year mortgage may not be best for you, even if it seems like everyone else is signing up for one. To start, people that are locked into a thirty-year mortgage have to pay quite a bit in interest, and they remain in debt much longer than someone that signs up for a fifteen-year mortgage.
As a result, fifteen year mortgages are becoming more popular of late. Approximately one-third of all homeowners are opting for them when they refinance their properties. It doesn’t matter if you are buying a home for the first time or if you are refinancing, a fifteen year mortgage may be right for you for several reasons. Think through the following points.
If your finances are under control, and you do not have much debt or outstanding payments, it may be a good idea to get a fifteen-year loan. This is particularly true if you have a stable job. Of course, you will pay more money each month, but you will be debt free much sooner. That means you will pay less in interest over time.
Consider a home with a purchase price of two hundred thousand dollars. Assuming you qualify for both a fifteen year and a thirty-year mortgage and assuming that the interest rate on both is four percent, you will pay much more in interest on the thirty-year mortgage. Your total interest payment will be just over $143,000. However, with the fifteen-year mortgage, your total interest payment will be around $66,000. Of course, the monthly payment is different. You’ll pay nearly $1500 per month with the shorter term but only around a $1000 with the longer term loan.
If you choose the fifteen-year mortgage, you will save nearly eighty thousand dollars in interest. Depending on how much the house costs and what the interest rate is, you may save even more with a shorter term loan. Therefore, if you can afford the monthly payment, do it!
Of course, a higher monthly payment is a little scary to think about. If you lose your job, you may not be able to make the payments, particularly if your next position does not pay as well. However, if you feel that your job is secure, and you think you will be in your current position for a while, there is no reason not to take a leap and go for the shorter term loan. Also, if you are on salary (rather than on commission), it is probably safer for you to opt for a higher monthly payment. Of course, your circumstances should be taken into consideration because you never know.
Once you retire, your income is fixed. You do not want to have a lot of debt during this stage of your life. Therefore, if you are closing in on retirement and you plan to purchase or refinance a house, a fifteen-year mortgage may be best for you because it allows you to pay off the house before your income is limited. Also, most people make more money later in their career than in the beginning, so you may have a more expendable income to put toward a higher monthly payment.
Your home likely makes up a considerable chunk of your monthly living expenses. If there are other things that you want from life, like traveling to an exotic location, it makes sense to pay off your home loan as soon as you can so that you have money to put toward other things. In a way, opting for a shorter loan term forces you to save money. You can’t blow as much each month on unnecessary stuff because you are putting a large chunk of your income toward your house.
Prodigy Lending is a DBA of AmCap Mortgage, Ltd. (NMLS ID# 129122 – www.nmlsconsumeraccess.org/EntityDetails.aspx/COMPANY/129122), an Equal Housing Lender.
Managing RMLO: Jason Turner (NMLS #286357)