Think twice before you get a 15-year loan. As you consider buying a home, you will be presented with two mortgage options: a 30-year mortgage or a 15-year mortgage. The 30-year loan is considered “standard” by many, but there are those who prefer the 15-year loan. This is because the 15-year mortgage comes with a lower interest rate. That can result in saving a boatload of interest over the years. Is that reason enough to go with the 15-year mortgage?
How Flexible are Your Finances?
One of the biggest drawbacks to a 15-year mortgage is that it lacks a certain flexibility. In most cases when you get a 15-year mortgage instead of a 30-year mortgage, you either have to make a higher monthly payment or you have to settle for a smaller house. Once you get that 15-year mortgage, you are locked in – unless you refinance to a longer mortgage down the road.
If you decide on a 30-year mortgage, you might have a little more flexibility. You can get a larger home for the same payment. If you plan to stay put for a while, this can be an advantage.
Neal’s Notes: You might be drawn to a 15 year mortgage as rates are so low you might be able to keep your payment stable yet pay off your mortgage that much quicker. Good thinking but slow down. Sometimes a refi masks other problems. Make sure you are fully aware of all your reasons for refinancing before getting started. Sometimes a refi causes more problems than it solves.
For those who would get the same size home regardless, a 30-year mortgage offers payment flexibility. Your lower payment provides you with a little more wiggle room in your budget. You can make extra payments toward your principal and pay off the mortgage early if you want to.
This way you have the option to save some money on your mortgage, but if you run into some financial difficulty you can go back to the regular 30-year payment. This flexibility can be quite useful if you are concerned about what the future holds.
It is also worth noting that you may not be able to refinance your home to a 30-year mortgage if your financial situation changes. This is especially true if you don’t have a sizable down payment and if you are still in the early years of your mortgage before you have built up a fair amount of equity.
When a 15-year Mortgage Is Most Likely to Benefit You
A mortgage with a shorter term is most likely to benefit you when you plan to stay in your home for a longer period of time. If you know you will be settled in your home for many years, a 15-year mortgage can be the means of securing you a long-term stable home at a discount from a 30-year mortgage.
However, if you do decide to get a 15-year loan, it’s a good idea to make sure that the payments aren’t a stretch for you. Many recommend that you should keep your housing costs to no more than 30% of your net monthly income. However, you might be better off if you make sure to keep your payments to no more than 25% of your income. That way, you will have a little room in your budget in the event of a financial setback.
As with all financial decisions, it is up to you to determine what type of mortgage product is most likely to benefit you. Study the pros and cons and consider your financial situation. You might find the flexibility and affordability (especially if you pay it off early) of a 30-year mortgage more desirable than a 15-year mortgage.