Should You Have a 15-Year or 30-Year Mortgage?
The majority of new homeowners opt to go with a 30-year mortgage; however, this isn’t necessarily always the best option for buyers. Most people are focused on securing the lowest interest rate and monthly payment possible, which is good. However, these are not the only things to consider when deciding the length of your mortgage term. There are other factors that come into play and that will have an impact on you down the line.
Comparing the Two
A 15-year mortgage means that you will be able to pay off your home quicker and save money on interest while you’re at it. Although this seems to be a smarter decision than the 30-year mortgage, everyone’s situation is different, and you will need to take a look at your finances to figure out what you can and cannot handle. While the shorter mortgage term means you can pay your debt off faster and save on interest, it also means that each monthly payment will be much higher than a 30-year term. Many people opt for the longer term because their monthly income is not enough to cover a higher payment and still afford all of their other expenses.
With a 15-year mortgage, you will build equity much more rapidly due to the higher payments. Home equity is essentially the market value of the home minus what you still owe on your balance. Home equity can be utilized to make repairs on your home or begin a renovation. All you would need to do is refinance your home or take out a second mortgage. Keep in mind though that this could very well cause the value of your home to drop, which could hurt you in the future if you ever decide to sell your home. 30-year mortgages mean lower monthly payments but with more interest over time. However, there are some major positives to selecting this loan term. For families with more monthly bills such as childcare, a longer term means that they are able to set aside more funds for their child’s current and future education. This also leaves more money aside for emergencies, home repairs, etc.
Merging Them Together
An ideal situation for many buyers would be to have the lower payments that come with a 30-year mortgage and the interest savings that come with a 15-year mortgage. This is completely attainable if your mortgage won’t penalize you for making early payments. You will be able to put additional money toward your mortgage when you have extra room in your monthly budget. If you have a prepayment penalty in your agreement, you will owe additional fees for paying your mortgage early. Make sure you pay close attention to the terms of your contract before signing to make sure there will be no penalty if you think you’ll want to repay early down the line. A good way to get your mortgage paid down early is to have a plan. With the proper savings plan, you could end up being able to pay a few extra payments or more each year. Any money that you are able to set aside can be placed into a high-yield savings account or investment account to grow until you are able to decide how much you are able to allocate toward your debt. You could also split your mortgage in half and make two payments a month if your loan servicer allows you to. At this rate, you will be making an extra payment per year and you will be on a great track when it comes to paying off your debt early. Everyone has an option that would fit them and their situation the best, so you have to evaluate your financial situation in order to decide which is right for you. How long do you want to be responsible for a mortgage? How much of your monthly income can you afford to allocate towards housing? What are your long-term goals in this area? Taking the time to ask yourself these questions and look into the future will allow you to make the best decision for yourself and your family. Both terms have their benefits, but you can only choose one so make sure it’s an appropriate fit.