When you first purchase a home, it seems like a no-brainer – you should choose a 30-year mortgage, after all that is what everyone else does. While it does make sense to try to stretch those payments out as much as possible in order to be able to afford more home, in the long run, it could be the biggest mistake that you make. Do you really want to be paying that mortgage payment for 360 months and barely touching the principal amount until many years down the road? After careful consideration, a 15-year loan might make more sense; it will just take a little sacrifice.
Paying Interest Only
Before you take out a 30-year mortgage, ask to see the amortization schedule that coincides to your mortgage. Take a look at the first 10 years or so and see how much of your payment goes to interest and how much goes to the principal. Chances are a large portion goes to interest. What does this mean? Simply that you are paying more to have the borrowed money owed for 30 years rather than 15. After a few years of painstaking payments, the sad news is that you still do not have very much equity in the home, unless you put down a large down payment. What is to say that you will not walk away from this home if the going gets tough and you can no longer make payments? After all, you barely have any equity in the home.
Affording the larger Payment
If paying thousands of dollars in interest over the course of a 30-year loan does not sit well with you, it is time to crunch the numbers and figure out how to afford a 15-year payment. It will likely take some sacrifice on your part. Because we are so ingrained to purchase the largest house that we can afford, despite the amount of money it will cost in the end, everyone naturally gravitates towards the 30-year loan. Before you do that, consider a less expensive house on a 15-year mortgage. Yes, the payment will be higher than it would be on a 30-year mortgage, but if you look at the bigger picture, you are saving thousands of dollars in the long run.
How you Save on a 15-year Mortgage
The 15-year mortgage is always going to save you more money because of the decreased amount of interest that you will need to pay. Not paying interest for 180 months could save you a significant amount of money. Depending on the dollar amount of your loan, it could even save you more than $100,000 in the long run. Now when you look at the numbers that way, it is easier to choose the less expensive house rather than the much more expensive one that must be financed on a 30-year mortgage.
The Downside to the 15-Year Mortgage
Of course, because you have a higher payment, you will also need to have a higher amount of money in your emergency fund. No one can predict the future and what will happen with your income or health. Having an emergency fund available is the only way to ensure that you will be able to continue to pay your mortgage should something happen. While you need an emergency fund with any size mortgage, with the 15-year term, you will have significant equity in your home much faster, making you want to fight to keep your home should something happen to your income in the future.
Every loan has its advantages and disadvantages, but today the trend is to lean towards the 15-year term rather than the 30-year term. If you are unable to afford a 15-year term on any home, then it makes sense to take the only loan option available to you. But if you can afford it, you should look into the 15-year term and how it will affect your home ownership status in the long run.Click to See the Latest Mortgage Rates»