Should I get a 30-year or a 15-year mortgage?

If paying off your house is a priority, a 15-year mortgage is something to consider if you can handle a larger monthly payment. That is the biggest drawback for most people. But, if you can afford it, a 15-year mortgage can be a great way to go because of the money saved. And we’re not talking about pennies. It could be hundreds of thousands of dollars.

The shorter term actually makes the loan cheaper because it is less risk for a lender. Because of that they offer lower rates – anywhere from a quarter of a percent to a full percent.

And the government-supported agencies that finance most mortgages impose additional fees, called loan level price adjustments, which make 30-year mortgages more expensive.

But a 15-year mortgage isn’t the only way to pay your house off sooner. Making additional principal payments can reduce your balance without tying you to a higher monthly payment. One extra payment per year can make a big difference. Making an extra mortgage payment each year (totaling 13 payments in a 12-month period) could reduce a 30-year mortgage loan to approximately 22 years.

The most budget-friendly way to do this is to pay 1/12 extra each month. For example, by paying $975 each month on a $900 mortgage payment, you’ll have paid the equivalent of an extra payment by the end of the year.

Overpaying also offers a shorter path to an equity position, so when you are ready to sell, you have more equity in your home and are in a greater buying position. And if you do get into a situation where you need cash you can always pull the equity out of your home.

I’d be more than happy to discuss this further with you and answer any questions you may have. Just give me a call.


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