One of the biggest decisions you will have to make as you purchase a home (or even if you refinance) is whether to get a 15 year mortgage or a 30 year mortgage.
When choosing which type of mortgage to get, here are some things to keep in mind:
Interest Rate
The first thing to recognize is that the interest rate is going to be different. A 15 year mortgage generally comes with a lower interest rate than a 30 year loan. This means that a 15 year mortgage will save you money overall. You’ll have a lower interest rate, and you’ll be paying for a shorter period of time. You can save thousands of dollars over the life of your loan if you choose a 15 year mortgage over a 30 year mortgage.
While this is a compelling argument, it’s not the only argument, and it’s vital that you consider other factors as well.
Monthly Payment and Cash Flow
While a 15 year mortgage costs less than a 30 year mortgage, it doesn’t take into account the realities of your financial situation. Since you are cramming the same size of loan into half the term, your monthly payments with a 15 year mortgage are going to be higher than you would see with a 30 year mortgage.
With a 30 year mortgage, you can spread out the repayment, and that means that you pay less each month. From a monthly cash flow standpoint, this might make more sense than getting a 15 year loan. If the payment for the 15 year loan is just at the edge of what you’re comfortable with, all it takes is a minor unexpected financial difficulty, and all a sudden you can’t pay your mortgage.
A 30 year loan gives you more breathing room. You have smaller monthly payments, so you can create a little room for unexpected expenses and setbacks. For many, a 30 year loan makes more sense because it offers a little more flexibility.
Idea: Get the 30 Year Loan But Make Larger Payments
Many home buyers are interested in the idea of paying down a mortgage faster, and paying less in interest overall. One way to get the best of both worlds is to get a 30 year mortgage, but make payments as if you have a 15 year loan. You can pay down the mortgage faster, and save on interest (although not as much as you would with a lower rate for a true 15 year loan). However, if something happens and you can’t afford the 15 year payment, you can cut back to your 30 year payment, since that is what you have agreed to.
Make sure you weigh the pros and cons associated with your situation before you commit to a mortgage term. You want what works best for you.
