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Compare 15- and 30-Year MortgagesBy Jeff
BillSavings.com Brief:
The common thought of homeowners is that if you pay off your home more quickly that is the best use of your monthly income. And while it does benefit borrowers to pay off their mortgages as quickly as possible, a 30-year mortgage can offer the same type of flexibility as a 15-year mortgage. Borrowers can pay more than the monthly minimum on a 30-year mortgage to pay it off quicker.
Which is better, a 30-year mortgage or a 15-year mortgage? Once you have decided on a fixed-rate mortgage for your home purchase, it's best to compare mortgages. Should you go with a 30-year mortgage or one that spans 15 years? For many borrowers, the higher monthly payments associated with a 15-year mortgage are cost-prohibitive. Shorter loans also come with lower interest rates, but that doesn’t mean that a 15-year mortgage is right even if you can afford it. Can the money you would pay on a higher monthly mortgage be put to better use through other investments? That is a question that must be asked before deciding on which type of loan to pursue. A 30-year mortgage offers payment flexibility Just because you get a 30-year fixed mortgage doesn’t mean that you can’t pay it off early. Unless you acquire a loan that has prepayment penalties, paying more than your regular monthly mortgage payment is perfectly acceptable. A 30-year mortgage offers you the security of lower monthly payments while giving you the ability to also pay it off early. By doubling up on payments, you can virtually create your own 15-year mortgage packaged into a 30-year mortgage. Think twice before committing to a 15-year mortgage While there are many benefits to a 15-year mortgage, there are also inherent risks. If you lose your job, suffer a debilitating injury or encounter another unforeseen financial hardship, paying the higher monthly mortgage can be challenging. Many homeowners see refinancing as a means of escaping the trap of a 15-year mortgage, but that isn’t always a safe alternative. A change in your financial situation can adversely affect your refinancing. Can your money be utilized in a better way? For those borrowers who can afford to pay the higher monthly payments from a 15-year mortgage, can that extra money be used in a more productive manner? That is a question that every homeowner should ask before considering a 15-year mortgage. Paying the additional money on a 15-year mortgage brings a homeowner no tax benefits. If, however, a homeowner took the difference between a 30-year and 15-year monthly payment and invested it in a tax-free retirement account, he could see a savings of 35 percent. Putting your money in stocks, bonds and real estate can often lead to a higher return than what the mortgage interest on your income tax will yield. Do you have children? Another key component to consider when weighing the 30- and 15-year mortgage options is whether you have children. Putting money into your children’s college or retirement funds is probably a better choice than doing so in a monthly mortgage payment. Retirement funds are also not normally counted as an asset if you apply for financial aid. However, the equity in your home does count against your ability to receive financial aid for your children’s tuition. If you already have your children’s college tuition taken care of, then the added cost of a 15-year mortgage might be best. How long are you going to keep the loan? If you are going to compare mortgages, another key factor lies in determining how long you are planning on keeping the loan. If, for instance, you know that this is your dream home and you have no plans on moving, the 30-year mortgage with the clause of investing regular money in a retirement account is probably the best option. If you know that this is just a transitional home, though, the shorter 15-year mortgage might make the most sense. Assess your future goals before you compare mortgages Both types of mortgages have their pros and cons. Each person has to assess his financial goals and determine whether paying a higher mortgage payment is the best use of his money. For those people who don’t have the extra money with which to pay a 15-year mortgage note, the point is moot. But for those who have the financial flexibility that allows for an extra few hundred dollars a month, it is best to weigh the investment options to see how that money can best be used. 6/18/2008
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