When it comes to purchasing or refinancing a house, borrowers have to consider whether or not they want to go for the 15 year or 30 year option on their mortgage loan. Most people go with the easiest option, which is the 30 year plan. This is because it gives them more time to pay the home down and results in a lesser payment each month. However, you have to think ahead when it comes to personal finance. After all, if you can save a lot of money by going with a 15 year option, it makes sense to consider it from all viewpoints.
The primary difference between a 15 year and 30 year loan is pretty well known. A 15 year loan has a higher monthly payment, but you pay a lot less interest over time simply because it is repaid in half the amount of time as a 30 year loan. It means that you will own your home sooner because more of your payment is going toward principal than interest. When you get a 30 year loan, your monthly payments will be a lot less, but you will pay a lot more interest over time.
Many people who choose a 15 year loan are the same individuals who do a lot of forethought and planning when it comes to personal finance. Instead of simply thinking about today, they look ahead into the future. These people do not want to pay too much for a property simply to save a little bit on the monthly mortgage payment.
Here are some things to consider when trying to choose between a 15 year and a 30 year option on your mortgage:
-What can you really afford?
You need to look at your monthly payment and debt obligations to assess how much of a mortgage payment you can really afford. There are online calculators that you can use to give you an idea of how much you will save between a 15 year and a 30 year mortgage. You might be shocked at how many thousands of dollars you’ll save by going with the 15 year plan. However, if you cannot afford the monthly payment on a 15 year mortgage, it makes no sense to struggle each month.
-Are you saving for retirement?
Although real estate is a pretty safe investment most of the time, you can’t totally depend on it for your retirement. That’s why it’s very important that you’re still putting money aside in your retirement accounts each month. If having a 15 year mortgage keeps you from having the extra income to throw at your 401(k) or IRA, it may not be the best option for you.
-Do you have an emergency fund?
Before you sign up for a 15 year mortgage loan, you need to make sure that you have a good emergency fund in place of at least 6 to 9 months worth of expenses. You never know when you might suffer a job loss or medical issue that causes you to be out of work. Because of this, you don’t want a higher mortgage payment that you can’t handle unless you have a substantial emergency fund in place.
A 15 year mortgage can be of great financial choice for many people. As with anything, it really depends on the circumstances as to whether or not you should make this choice for yourself. Sometimes, it makes sense for a person to start out with a 30 year loan and refinance later into a 15 year option when they are in a better financial position to handle the monthly debt obligation. If you do some research online using amortization calculators, you should be able to see what your savings will be while looking at the two options. Then, you can make plans to put yourself in a financial situation will allow you to take advantage of that 15 year option later if you cannot do it right now.
To own the house sooner with less overall cost, a 15 year mortgage is excellent. But again a lot depends on how secure your job is and how much assets you have as cover. I think for families with a double income, this could be very attractive assuming they manage finances responsibly of course!
MoneyCone recently posted..Demystifying Mortgages For The First Time Home Buyer
Ah i hear you on security! It would be extremely hard to do it with a single income. Not only that, if you lose your job, you’d be dead in the water. With dual incomes I can see any family easily taking on this challenge.
I don’t agree that it would be extremely hard to do on a single income. I am closing next week on my third house (first home turned into a rental when I moved out of state – purchased second to live in – third is investment property) and all were purchased as 15 year loans. I have never had more than one income to depend on. The trick is to live WELL below your means.
We need to talk Jeff. I’m looking at getting int condo and apartment investing. Sounds awesome!
When I refinanced 8 years ago, I went with a 15 year mortgage. I wanted to make sure my mortgage will be paid off when I retire. It is my only debt.
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Good idea to pay it off before retirement! I want to do the same
Right now, aren’t 30 year mortgages with way to go? With the saved money, people can invest! Scared of the stock market? Try social lending! Mortgage rates are at so low right now, there are definitely ways to beat the rates with investing!
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It depends on what your goals are. Personally, a 15 year mortgage is better for me because I can;t stand debt and want to pay it off as soon as I can. If that meant not being able to invest, then yes a 30 year mortgage would be much better. Kind of depends on your personal situation i guess
Jon | Free Money Wisdom recently posted..Why a 15 Year Mortgage is a Smart Move
We purchased our first home with a 15 years mortgage. It seemed expensive at the time, but it was a great decision. After a few years, our income went up a bit and we could pay the 15 years mortgage with no issue. It’s amazing how much you save in interest.
retirebyforty recently posted..Debt Relief Options
Right on! The long term interest is what kills me inside haha. Hopefully i can do just that, increase my income and get it paid off pronto! I might be starting small with a condo property soon, who knows, we shall see.
I agree that a 15-year mortgage is the way to go if you can afford it but what do you guys think about getting a 30-year mortgage and paying it off like if it was a 15-year one? This is assuming there is no pre-payment penalty which hardly any loans have these days. The good thing about this is that if ever there is a time when you cannot send the extra money, you can just send the required amount and then pick it up again when you are able to.
Bernie you just hit the jackpot. I’m a huge proponent of that strategy. I love a loose cash flow and that strategy does just that. Much better to not be locked in to a shorter loan then not be able to pay it off. I actually did that with my car. I took out a $10,000 loan at 3% and ended up paying it four years early. Fantastic point Bernie, thanks for the comment!