Most home buyers grapple with the decision of taking a 15-year mortgage vs. a 30-year mortgage. They often choose the latter as the increased monthly payments on the 15-year mortgage are substantially higher. While monthly payments may be higher, the savings are enormous with tens of thousands being potentially saved. The 15-year mortgage also allows homeowners to build equity faster and leaves them free of mortgage debt in 15 years.
Let us pay close attention to the pros of a 15-year mortgage.
- Fixed interest rates
If you’re able to hold the mortgage, these instruments have a fixed rate of interest. As the amortization schedule is shorter, you’ll obviously end up paying more per month. It is important to think about this if you need the money for other debt like credit card debt. You should also think about how stable your job is and if you’ll be willing to sacrifice vacations or eating out every other day. Short term loans are less risky for banks and therefore the interest rates on these loans are almost an entire point lower compared to the 30-year mortgage. - Government-sponsored companies
If the mortgage is purchased by a government-sponsored company, it is likely that they will charge lesser fees over the course of the 15-year mortgage. Loan level price adjustment charges are applicable to people who take out a 30-year mortgage because they may also have smaller down payments and lower credit scores. 15-year borrowers enjoy lower mortgage insurance premiums from the Federal Housing Administration (FHA).
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- Financial discipline
Some people like the idea of making regular monthly payments over a 15-year period. People may want to get the mortgage out of the way so they can invest some money in their kid’s college fund or if they’re thinking of taking early retirement. - Appreciating asset
The extra amount invested in paying off your premiums each month will help in building home equity. It is a form of forced savings as you can’t put the extra money in a money market account but you have to invest it in your house which is appreciating in value.
Let us now examine some of the cons of the 15-year mortgage.
- Leaves borrowers vulnerable
Borrowers may be left vulnerable due to the lack of cash in the event of an emergency like losing your job or other unexpected circumstances like medical and healthcare emergencies. - More taxes
As you pay less over the course of a 15-year mortgage, the mortgage interest tax deduction also goes down. When you look at the loss of savings, it doesn’t look so attractive. - Loss of investment potential
When you decide to go for the 15-year mortgage, your money gets tied up in making payments each month. Financial advisors are of the opinion that the extra money can be invested in the stock market which gives good returns or put in a 401k for your employer to match. - Keep yourself updated with the latest on Mortgage. Like us on Facebook and follow us on Twitter for more on Investments.
