Is a 15-year Mortgage Right for You?

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Filed under: Market Comentary

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When buying a home, some buyers have the ability and option to select a 15 year term rather than 30.  The same can be true for refinancing.  There are definitely benefits to a 15-year loan, including a lower interest rate, a shorter life on your loan, and spending less on interest payments. In addition, you are more likely to enter retirement debt-free.

But is a 15-year mortgage a good or bad idea?

Here are a few aspects to consider.

Is your income reliable?

If you work on commission or own a business, you will most likely see your share of ups and downs. If your income isn’t steady or predictable, a 15-year mortgage might present future financial issues due to the higher monthly payment you will have.  You may make enough money now, but can the same be said 8 or 10 or 12 years down the road?

Not having that steady income where for one or two months you don’t “bring in” what you normally do, you might encounter trouble covering your other expenses, which may cause a financial problem.

Is your “emergency fund” lacking?

A rule of thumb is that you should have enough emergency savings to cover three to six months of living expenses. If you have a 15-year loan and you unfortunately lose your job or experience some financial emergency, you might find yourself in serious financial difficulty.  If you don’t have these reserves, you might be better off with a more affordable 30-year loan where you will have lower monthly payments.

Do you have enough “flexibility” in your budget?

A good guideline is that your housing costs should never surpass 30% of your “take-home pay.” If your 15-year mortgage exceeds this, you may want to reconsider the 15-year option. By keeping your housing expenses below the 30% rule will allow you more wiggle room in your budget. And by doing so, you will be less likely to face any financial obstacles if you encounter some type of sudden expense you were not planning. In addition, having a lower payment will give you more flexibility to enjoy your hard-earned money.

Can you afford to impede other financial goals?

It is true that a 15-year mortgage will allow you to pay off your home faster, but it might hurt your financial goals. According to a MacArthur Foundation report, between 2011 and 2014, 52% of Americans had to make at least one major sacrifice to covering their housing payments. This could be cutting back on health care, adding to your credit card debt, or even postponing retirement savings.

So, if you are paying for college or attempting to build your retirement “nest egg,” you may want to reconsider a 15-year mortgage.

A 15-year mortgage is still a great way to get debt-free faster!

Despite the potential pitfalls, if you financial situation puts you in a position where a 15-year mortgage makes sense, then it’s a great way to reach “debt free status” faster.  Depending on your age and your future plans, it could also save you a lot of money.

If you have any questions about mortgage terms and would like to look at a few different scenarios, feel free to contact me for a no-obligation mortgage analysis.

 

 

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