Though America’s most popular mortgage is the 30-year fixed-rate mortgage, it’s not your only option.
There are several factors you’ll need to consider when you decide how long you want to spend paying off your mortgage. It may seem obvious to base your decision on the best interest rate and lowest monthly payment, but there are other factors that affect your financial future.
Digging Deeper: 15- Vs. 30-Year Mortgages In Action
It may seem like the answer is right in front of you: a 15-year mortgage means you spend less time making payments. Better yet, you devote less of your hard-earned money to interest over time.
Though a 15-year mortgage might make the most sense on paper, a decision between the two depends on your individual situation. You’ll need to evaluate your personal finances and understand your ability to keep up with payments. Let’s take a look at the benefits of both mortgage terms.
The Benefits Of 15-Year Mortgages
The main advantage of a 15-year mortgage is all the money you’ll save on interest, since you’re paying on it for only half as long as a 30-year mortgage. Another obvious benefit is that you’ll own your home in 15 years; you’ll be free of mortgage payments after that.
With a 15-year mortgage, you also build equity in your home faster. Home equity is the portion of your property that you truly own. It’s the difference between what your home is worth and what’s left on the loan. That means you could tap into your home’s equity sooner for things like home renovations or repairs, either by refinancing to take cash out or a second mortgage.
The Benefits Of 30-Year Mortgages
The 30-year mortgage has consistently been the favorite among homeowners for its low monthly payment. Though more of your money goes to interest and you pay for twice the length of time compared to a 15-year term, the advantages of a lower monthly payment can't be ignored.
Budgets tend to fluctuate for many families. The costs of education, clothes, food, utilities and a need to save and invest can all vary each month. A lower mortgage payment means you can put more away for retirement, college funds and home repairs.
A 30-year mortgage could allow you to afford more physical property than a 15-year mortgage. If you need a bigger mortgage to buy a larger home, taking 30 years to pay it off would give you the freedom to make this purchase. It might not be possible if you only had 15 years to pay off the loan.
A True Compromise: 30-Year With 15-Year Payments
Can’t consistently afford the higher payments of a 15-year mortgage but want to pay off your 30-year mortgage earlier and save on interest? As long as your mortgage doesn’t have a prepayment penalty, you can make extra payments directly on the principal when your budget allows.
Prepayment penalties are written into your mortgage agreement. If your mortgage has a prepayment penalty, you'll pay fees if you pay your principal balance off earlier than you agreed to. Some lenders charge prepayment penalties, but others don’t, so be sure to ask about this when you’re choosing a lender for your mortgage.
If you don’t have a prepayment penalty, you’re allowed to make extra payments to the principal of your loan. This is a great way to save on interest and pay off your loan faster without committing to a shorter term. Here are a few tips to making extra monthly mortgage payments:
Tip #1: Budget Each Month
The great thing about making additional payments is that you can be flexible. If you find that you have additional funds this month, considering putting them toward your mortgage principal.
Tip #2: Plan Out An Extra Payment Or Two
Make a play to sneak in one (or two!) extra monthly payments per year.
One way to do this is to allocate money to a savings account or investment fund and pull it out for the extra payment when your budget allows.
A second method is to pay half your mortgage payment every two weeks instead of making one payment each month. This tends to line up with the payroll schedule for many workers and equates to 13 yearly payments, so you’ll be making an extra payment each year. Not all mortgage servicers offer this option; check with your mortgage servicing company to see if they offer biweekly payments.
Remember, mortgage length is much more than a simple question of how long you want to make payments. Is your budget relatively fixed or does it fluctuate? How much of your monthly income do you want to put toward payments? What do you expect your life to look like 5 to 15 years down the road? Assessing your monthly budget and long-term goals will help you determine whether a 15-year or 30-year term is right for you.
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