With interest rates still near all‐time low levels, an argument can certainly be made to consider a shorter mortgage term, such as a 15‐year loan versus a 30-year loan. But there are some important factors to consider.
The greatest benefit of choosing a shorter term is to know that the mortgage will be paid off in less time, saving thousands of dollars in interest payments over the life of the loan. A 15‐year term loan builds discipline, forcing you to make the 15‐year payment.
However, the shorter term comes with a steep monthly payment. A 15‐year loan payment can be several hundred dollars more per month than the 30‐year loan; and in these tough economic times, “cash is king.” That is, cash on hand is king.
Therefore, many people may be better served by having a smaller mortgage payment under a 30‐year fixed rate loan, and then saving or investing the extra money. The key is actually saving and investing the extra money. People who find themselves without a job or who have a pressing financial need would benefit from being able to access these saved funds.
The Tax Consequences
While paying less interest saves you money, it may not save you exactly what you thought since your corresponding tax write‐offs will decrease. Depending on your marginal tax bracket; this could make a substantial dent in the savings you thought were being achieved with the lower interest due. So you must consider income taxes for a relative comparison.
Middle Ground: Flexible Term Loans
You can also choose a point in between the 15-year and 30-year term loan. Refinances are possible to any whole term between 15 and 30 years. That means you can acquire a 17-year term loan or a 23-year term loan, if either of those terms best meet your payment and loan-payback needs.
Best Path for All
Since an individual’s or family’s mortgage payment is often their largest monthly payment, it’s important to get individual advice about your unique situation in order to make the best decision about your home loans. Your short- and long-term financial objectives must be considered.
We’re happy to help you with this decision…don’t take it lightly!
What are your thoughts on acquiring a home loan? Is it best to go with the lowest possible payment, or shortest affordable term? Let us know your thoughts!