How to Choose a Mortgage for 15 and 30 Years
As mortgage interest rates hit an all-time low again, you may be thinking about buying a home or refinancing your mortgage . But should you apply for a 15 or 30 year mortgage? Here’s how to decide which option is best for your family.
Benefits of a mortgage for 15 years
A 15 year mortgage offers several benefits. The biggest advantage may be an even lower interest rate, because a 15-year loan is less risky for lenders. You can also build your net worth faster because you will be making higher payments on the principal every month. If your goal is to get out of debt completely, you can achieve that goal faster with a 15-year mortgage.
Cons of a 15 year mortgage
The biggest disadvantage of a 15 year mortgage is the higher monthly payment. Locking a family up for higher monthly expenses can be risky, especially in a shaky economy. If you lose your job or other expenses increase, it may be difficult to afford a mortgage. It may also be more difficult for your family to save money and create a three to six month emergency fund .
Another major drawback: the opportunity cost. Spending more on your mortgage each month means you have less money to invest in other financial goals. Given that the 30-year mortgage interest rate is already below 3% , consider the opportunity cost of chasing a lower 15-year rate. Is it worth investing more money in your home when you can potentially earn more elsewhere? You can save and invest extra money in education or retirement.
How to decide which mortgage is right for you
As with most personal finance topics, many people have strong opinions about the decision to pay off their mortgage sooner, but the truth is, there is no consensus on what is best for everyone. interest will keep you awake at night, you may prefer a loan for 15 years. But if your income is unstable or you are worried about layoffs, you might be better off opting for a 30-year mortgage. Although a 30 year mortgage is more expensive, there is no “right” or “wrong” solution for your family.
Here’s one more thing to watch out for: Most 30-year mortgages don’t charge a prepayment penalty, so you’ll almost always have the option to pay more than your minimum payment every month. By applying extra money to the principal, you could effectively shorten the term of your mortgage – and save on interest – while giving yourself extra flexibility by allowing you to pay less if and when you need to.