For all those contemplating buying a home or an investment property, you may be wondering what type of mortgage is best for you. Well, the answer of course depends on your situation. Because that isn’t exactly helpful, let’s run through the pros and cons of choosing a 30 year fixed rate mortgage–which, to answer the question posed above, remains the most popular option among home buyers by far.
Lower Monthly Payments: When your loan payments are spread out over 30 years versus 15, there is no surprise that the monthly cost is less. This is ideal if you don’t have a ton of leftover money each month after budgeting for all of your expenses.
A Nicer Home: Especially for first time buyers who may be earning less than people shopping for a second or third home, a longer mortage term allows you to buy a more expensive home (due to those lower monthly payments.) Of course, buying a larger, better located, or simply nicer place should result in a better return on investment when you go to sell. That being said, it’s never a great idea to buy the priciest home you can possibly afford–being a bit conservative and leaving money for a rainy day is always wiser.
Flexibility: First, ensure that your 30 year loan does not have penalities for making extra payments. Once that’s settled, you have the flexbility to pay off your loan more quickly and save yourself lots of money in interest! The great thing is if your financial situation changes–you suffer an unexpected job loss or something along those lines–then you can go back to your initial (smaller) monthly payments. If you have the option of paying more than you have to and the discipline to do so, then having a 30 year mortgage and paying it off in 15 can be the best of both worlds–it slashes the total interest you pay while also offering a fallback plan if your finances go downhill.
Now, onto the cons of a 30 year mortgage.
Owning Your Home Takes a Long Time: Simply put, getting a 15 year mortgage means that your home will be paid off in half the time of a 30 year loan. For those who can manage a shorter mortgage, it will mean you are in debt for many fewer years!
Saving Money: The issue with opting for a 30 year mortgage with intentions to pay it off in 15 and avoid massive interest is that good intentions don’t always translate into action. Choosing a shorter mortgage from the jump ensures that you will save boatloads of money on interest–whereas going with a 30 year leaves open the possibility that instead of paying it off more quickly you will submit to temptation and spend that extra money on clothes, a vacation..you name it!
More Equity More Quickly: With a 15 year mortgage, you pay down interest much more quickly than with a 30 year. As a result, more of your monthly payment goes to pricipal and less to the bank–certainly preferrabe if you can swing it.
All things considered, a shoter mortgage will save you more money over time. However, it may simply not be feasible depending on your situation. Whatever you choose, talk to a qualified lender for sound professional advice, as buying a home will be the biggest financial decision you make!
Please call Lise at 240-401-5577 if you’d like a referral to an experienced and knowledgeable lender!