Negotiating mortgages can certainly be a daunting task for first-time buyers. Many potential borrowers don’t fully understand a mortgage’s risks and costs, much less know exactly what mortgage type is right for them. 15-year mortgages can be very attractive because of their low interest rates when compared to 30-year mortgages, but that doesn’t mean they’re the right choice for everyone.
Different types of mortgages structure their payments differently, meaning that buyers need to consider not just what they are willing to pay for a loan but also what they will be paying over the long-term. Here we discuss some of the most essential questions you should consider before choosing a mortgage term:
1. Can you afford a 15-year mortgage?
Compared to a 30-year mortgage, a 15-year mortgage has a lower rate, but there’s a tradeoff there where you have to make higher monthly payments. Since 15-year borrowers have now promised to pay off their loan in 15 years, rather than in 30, each individual payment will be larger. In the long run, you do save on interest payments, because you pay off the balance faster, but the higher mortgage payments may make it harder to save for retirement, college funds, or other investments. Saving money long-term may just not be worth the price of financial strain for the next 15 years! If the higher mortgage payments are going to be difficult for you to scrape together each month, a 30-year mortgage may actually be the better choice for you.
2. Is this your first home?
For first-time buyers, a 30-year mortgage is often a smarter choice because of those lower monthly payments. Long-term mortgages can help take an expensive house and make it an affordable option for first-time homebuyers.
For homebuyers who are certain they will be reselling the house in a short amount of time, however, there’s also the option of taking out an adjustable-rate mortgage. This type of mortgage term has a low, fixed rate for a certain period of time. After that time expires, interest rates could rise and buyers could pay more. This type of mortgage is best for those who only plan to own the house for a few years before reselling it.
3. Are you looking to refinance?
Refinancing from a 30-year mortgage to a 15-year mortgage can be a good option for some people. If you’re keeping up well with your 30-year mortgage, it might be possible to refinance it to a 15-year mortgage with similar payments. This change might be a good option, especially right now, because of the difference between interest rates. In the past, the spread between the 30-year and 15-year fixed rate mortgages has been around a quarter percent, but the current spread is around 1% in some areas.
4. Will you be retiring soon?
Borrowers who take out 15-year mortgage are typically at least 40 years old. These borrowers prefer to pay off their mortgages faster, in the hopes of retiring with little to no debt on their house. Of course, as we mentioned earlier, higher monthly payments can make it difficult to set aside the money for retirement, so that should be taken into consideration as well.
5. Do you follow your savings plan strictly?
If you are a disciplined saver who follows their savings plan to the letter, you may be able to get past the higher monthly payments of a 15-year mortgage and be able to set aside enough money for long-term future plans. Many people, however, choose a 30-year mortgage term because their lower individual monthly payments mean they can be more flexible with their savings plan, and have less chance of having to dip back into their savings for emergencies.