Discussions of mortgages often focus on interest rates, but there is a much more basic decision to make. Should you go with a 30 year mortgage term or a 15 year mortgage term?
30 Year vs. 15 Year Mortgage, which is best?
Any discussion of mortgages tends to turn on two points. How can you qualify for the most money with the lowest payment, and how can you get the lowest interest rate for the mortgage? While these are two important issues, there is an additional one that people fail to consider, resulting in significant wasted money.
The term of a mortgage is extremely critical for a couple of reason. First, it sets the length of the obligation you are undertaking. Second, it defines the amount of interest you are going to pay over the life of the loan. These are huge issues when it comes to building equity, and deciding if a 15 or 30 year mortgage is best for you.
The longer the loan, the more total interest you are going to pay. The trade off, of course, is, you are going to have smaller monthly payments the farther you stretch out the obligation. While this may sound like a good goal when you first get the mortgage, it can backfire on you in the long run.
Most people focus on interest rates as a way to save money on morgetgas. This is a valid approach, but playing with the length of the loan is a better way to save money. If you can cut the payments in half by going with a shorter loan, you can save huge amounts on the total interest paid to a lender.
The decision on the term of the loan is relatively simple, but entirely dependent upon your personal situation. There is no absolute correct choice. First, you need to determine if you can comfortably afford the higher payments that come with a shorter term loan. In general, a 15 year mortgage will have monthly payments 20 to 25 percent higher than a 30 year loan.
If you can afford the higher payment, then that is the correct choice for you. By doing so, you will pay the loan off faster, and be building equity in the home quicker. However, if the monthly payment on a shorter term loan will stretch your budget, the more popular 30 year mortgage is best for you. Although you will pay more interest over the life of the mortgage, your monthly payment will be considerably lower.
If you do opt for the 30 year loan, make sure the mortgage has no prepayment penalty, allowing you to make extra payments toward the principal balance of your loan, which will not only reduce the total interest you pay over the life of the mortgage, but will also effectively reduce the remaining term of your loan.
If you would like me to run an amortization schedule for you that will show how much you will save by making extra payments toward your loan balance, please feel free to contact me.
Lester Bleich, New York State Licensed Mortgage Loan Originator 