Whether you are considering a 15-year mortgage as a first-time loan or as a refinance, there are pros and cons to the setup.
Let’s first talk about a brand-new mortgage.
Let’s say you are considering a $300,000 loan and a 30-year mortgage. This loan will be amortized over the 30 years, which means you will start off paying higher interest first and more and more principal as the loan matures. Most lenders will give you a lower rate if you choose a 15-year mortgage over a 30-year mortgage but the benefits may not outweigh the interest rate savings.
For instance, let’s assume that a 30-year mortgage will be about 4% while a 15-year mortgage would be at 3.5%. You might be able to save anywhere from $50-$75 per month going with a 30-year loan but for the purposes of tax deductions, you will be paying more in interest, therefore you will be able to deduct more on your taxes than if you are paying for a 15-year mortgage. For the first few years, the interest deductions for tax purposes could be roughly the same but in five years or more, you will be able to cash in on the tax deduction with a 15-year mortgage.
Going with a 15-year mortgage will definitely pay your mortgage off faster and build up your equity quicker. The equity is the difference between the market value of the property and what you owe on the home. Generally, property values increase anywhere from 5 to 15% annually, so not only are you building up equity but general inflation is building it as well. But, could you take that money and invested elsewhere?
It really comes down to a matter of personal preference and situation. For those looking to retire in 15 to 20 years, taking on a 30-year mortgage might not be in their best interests. Retirees will probably want the home paid off by the time they retire In this case, a 15-year mortgage would be the better option.
But let’s also talk about refinancing.
If you have a 30-year mortgage and you can refinance for at least one whole percentage point down, it’s worth it to do so, regardless of a 15 year or 30-year mortgage. However, if you can support the payment and you have more than 15 years remaining on your mortgage, a 15-year term might be ideal. You can get the home paid off faster, do more equity and even if you plan on selling within the next 5 to 10 years, your equity will have increased much faster than a 30-year term. This means when it comes time to sell, you will receive more for the sale of your home in your pocket.
So the downside is you will be paying a higher price each month and you may not reap the tax deduction benefits, but, you will be paying off your home faster, gaining equity quicker, and alleviating that mortgage burden in half the time.
If you’d like to play around with the numbers to find out what a 15-year term mortgage would be for your home either in refinancing or in a new property, give me a call today.