Is it a good idea to get a 15-year mortgage instead of a 30 year? Maybe.
The reason we say that is every single client’s situation is different. For example, someone who is 15 years away from retirement has different things in mind than someone just starting their career. A person who is considering leaving their company to start a business is in a different boat than someone completely happy at their current, stable job.
Let’s see why these different scenarios are so important.
A 15 Year Mortgage Costs More in the Short Term
As you know, the advantage of having a 15-year mortgage is you pay it off in half the time of a 30-year loan. Nice!
…but there is a downside to it. In the short run, you will be spending a lot more money because you’re paying down the principal of the loan so quickly.
How much more does it cost? Well let’s pretend your mortgage is $225K, your interest rate is 3.92% and you took out a 30-year mortgage. In that situation, your mortgage would be around $1,064 every month*.
What if you got a 15-year mortgage instead? Well, the interest rate would probably be lower, so let’s say it was 3.42%. Now your mortgage is $1,600 a month* – a full $536 more every month.
That’s a big deal because that $536 which you are putting into your home could otherwise be going to something else. That’s why the life situation is important.
Hidden Costs of a 15 Year Mortgage
If you’re putting that $536 into your house every month, that means there are a lot of things that aren’t getting that money.
For example, are you trying to get a business off the ground at night? $536 could go a long way towards paying for ads, buying inventory, paying freelancers or an assistant, etc. But now it’s not available, so your business may take off slower than possible.
Maybe your health isn’t good, and you’ve been thinking of eating healthier but struggle to find the time to cook. You could use the $536 every month to order healthy meals, but instead that money isn’t available because it’s going towards the house’s principal.
Or you could always invest it in the stock market. While it is not guaranteed, you’ll generally get better returns (about 10%) compared to the money saved by paying off your mortgage early (the 3.42% interest rate.)
People Who May Want a 15 Year Mortgage
There’s even more to the complexity though. Even though there are hidden costs, it still makes sense for some people to bite the bullet and get the shorter mortgage.
Why? There could be a few reasons. Some people despise debt and want to be debt-free ASAP. Maybe you want the guaranteed 3.42% payoff instead of risking the stock market. Everyone has different feelings about risk, debt, homeownership, etc. Some people want to be debt-free, so they don’t have that big mortgage payment hit their wallet every month.
Wrapping it Up
So, what’s the best option for you? Should you get a 15-year mortgage? It is tough to say without a personal consultation. Call us at (844) 765-6844 and we will walk you through your options.
*Mortgage payment excludes monthly property tax and insurance payments.
On a FHA 30-Year fixed rate purchase with loan amount $471,306 (at 96.5% LTV with 3.5% cash from borrower), at an interest rate 3.25% with $532.58 discount points (Annual Percentage Rate – 4.3247%), you will be required to make 360 equal monthly payment of $2051.15 (which includes principal and interest only, so your actual payment, including taxes, insurance and other property charges, will be higher).
On a FHA 15-Year fixed rate purchase with loan amount $471,306 (at 96.5% LTV with 3.5% cash from borrower), at an interest rate 3.25% with $1,767.40 discount points (Annual Percentage Rate – 4.2133%), you will be required to make 180 equal monthly payment of $3,311.72 (which includes principal and interest only, so your actual payment, including taxes, insurance and other property charges, will be higher).