When it comes to financing your new home, one of the most important (and often sleep-ruining) decisions you will have to make is whether you should go with a 15-year or a 30-year mortgage. What makes the decision so agonizing is knowing that both forms of mortgage come with significant pros and significant cons. And while only you can make the ultimate decision that makes you comfortable, it pays to know these pros and cons well before you decide. And, hopefully, get some good sleep.
Advantages of a 15-year Mortgage
The most obvious advantage to a 15-year mortgage is that you will pay it off in half the time. And there’s nothing like outright owning the place you live. Another distinct advantage, if you qualify for a 15-year plan, is that interest rates for 15-year mortgages are generally lower than for 30-year mortgages. This, of course can save you a lot of money in interest that otherwise would give you less equity in your home.
Disadvantages of a 15-year Mortgage
If those two advantages seem fantastic (and they are, really) consider that while interest rates are lower with 15-year loans, monthly payments are often considerably higher than for 30-year mortgages. Whereas you might pay $1,000 a month on a 30-year mortgage, you could feasibly be paying $1,300 a month on a 15-year loan. And while that extra $300 might not seem like much, remember that every month for a year spells $3,600. Depending on how tight your budget is, that extra money could come around to haunt you. Also, rates are generally fixed, meaning that you can’t take advantage of lower-interest deals without a costly refinancing.
Advantages of a 30-year Mortgage
The largest advantage of a 30-year mortgage lies in its lower monthly payments. Maybe you could afford the 15-year mortgage’s monthly payments, but a 30-year plan’s lower payments can allow you to save your money and even give you the option of sending in higher payments to knock down the principle. Or use your savings to take a vacation or build an education fund for the kids.
Disadvantages of a 30-year Mortgage
The obvious big drawback for a 30-year mortgage is that it takes 30 years to pay it off. If you have small children, they’ll be at or close to the age when they can run for president (35) by the time you make your last payment. Psychologically, the idea of being in a 30-year contract scares some people, who will feel stuck. And higher interest payments over a long time can mean that you end up paying three or more times what the list price was when you bought your home three decades before.
Ultimately, discipline and a good, hard look at what you’re financially capable of should make the final decision for you when considering what term you want your mortgage to be. Posted by Richard Soto on
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