How to Decide Between a 15- or 30-Year Mortgage
When buying a new home, most people will need a loan or mortgage. So deciding between a 15- and 30-year mortgage is an exercise in future planning that not all home buyers want to complete. Overwhelmed at the expense of the down payment, a homeowner may choose a 30-year without really thinking. But before choosing the more budget-friendly payments of a 30-year mortgage, it may be time to consider what that will spell for a person's overall finances. Here are a few key points to keep in mind before opting for a mortgage type.
Remember the Interest
For some home buyers, there's no question between the two options. If a person's finances are too tight, they may have no choice but to accept 30-year terms. However, if there's any wiggle room at all, every homeowner needs to consider what the interest will do to their savings. A 15-year mortgage may have higher payments, but it will also may have a lower rate of interest. Even a tiny fraction of a percentage point can spell thousands of dollars extra in that last decade and a half. It also means that the homeowner will build equity very slowly over time, forfeiting a high percentage of their payment straight to interest.
Getting Out of Debt
Being in debt for 30 years is a long time, and it can subconsciously affect other decisions in regard to the home. A homeowner may be less likely to fix up a home if they know the bank owns the vast majority of the property. When a person owns the property free and clear, they're able to take full ownership of the home. This may not mean much if a person is planning to leave the home within five years, but those who plan on staying will appreciate the independence.
A Question of Flexibility
The terms of a 30-year mortgage aren't usually set in stone, which can make them attractive to those who want flexibility. Lenders give homeowners a chance to pay off the mortgage earlier and reduce the amount of interest owed. If a homeowner runs into tough times, they can choose to revert to the original lower payments. Experts advise caution though if a homeowner chooses this option. It's much easier to spend the money on other purchases rather than putting it toward paying off the home early.
Taxes and Investment
Some Vallecito Lake homeowners choose a 30-year mortgage because they want to invest the money they would have spent on higher payments into other securities. Whether it's stocks, real estate, or a high-interest savings account, they may try to build their savings up in other ways, so they can pay off the home in one fell swoop. In addition, homeowners are allowed to write off their mortgage interest, which can make for a substantial tax break at the end of the year.
Qualifying for Terms
There a few things to note about the terms of the different mortgages:
- More people are likely to be approved for a 30-year mortgage
- The average 15-year mortgage is .75% less interest than a 30-year
- Homeowners qualify for less money with a 15-year mortgage
- Most 30-year mortgages are fixed-rate, meaning reliable monthly payments
A 30-year mortgage may be the right choice for a person who's building their portfolio and plans to leave their property in a few years. However, for most long-term owners, a 15-year mortgage will mean less money paid over time coupled with a more substantial feeling of ownership.