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Home buying The debate over 15- vs. 30-year mortgage

With housing prices down and mortgage rates at historic lows, buying activity has increased. Clearly it’s less expensive to buy now than when rates go back up. It’s also an excellent time to refinance, especially those who still hold adjustable-rate mortgages. But what’s the best type of mortgage for your situation?

When clients query me about whether they should select a 15-year or 30-year amortized mortgage, I ask the following questions. How long will you be in the home? Do you anticipate that someday in the future you’ll want to refinance the home and remove equity for improvements or other financial needs? How much can you afford to pay on a monthly basis? Do you have other investments that are yielding you a good return? What do you project your income will look like in the future and for how many more years will you likely be working?

A 15-year mortgage will have a lower interest rate and a higher monthly payment than a 30-year mortgage. The obvious benefits are that your cost of dollars is lower with a 15-year loan. Because with a 15-year mortgage you are paying more to principal every month, your outstanding balance on the loan will be reduced much faster. Presuming you keep the loan and home for term, you’ll own it free and clear in 15 years. You’ll actually pay less for your home over time because you’re paying it off in a shorter period. Here’s an example using a $300,000 loan amount. 15-year mortgage at 5.375%, your monthly payment would be $2431 and your total amount of interest paid in 15 years would be $137,651. On a 30-year loan at 5.625%, your monthly payment would be $1727 and your total amount of interest paid in 30 years would be $321,709.



But there are many reasons one would elect to have a 30-year mortgage instead. For many of us making payments on a 15-year mortgage would be a daunting task, or at best would leave us with little excess money for the general expenses of life. We might like the notion of being mortgage-free by the time we’re retired, but statistics say many of us won’t stay in the same home for that long.

Many financial planners I’ve spoken with feel it makes more sense to obtain a 30-year mortgage and take the money you save monthly in your lower payment and invest it. In the example sited above, that’s $8400 per year you would save which gives you a good start towards building a nest egg for the future. Some of my clients over the years have done a combination of putting some of that money aside, using some for improvements, using some to make an extra mortgage payment at the end of the year, etc. You simple have more flexibility with a 30-year as you’re not locked into a higher payment commitment. Finally, from the standpoint of taxes, a 30-year loan gives you more interest deductions than a 15-year loan does. Your CPA can help you analyze your situation from a tax perspective.




There are pros and cons to both mortgage terms. Work with a reputable and experienced mortgage consultant who will help you explore what type of program works best for your needs and goals.

Susan Costello is owner of Home Sweet Home Loans. You can reach her at 530-273-8658.


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