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“15-Year vs 30-Year Mortgage - What's Better?”

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This week we are exploring topics related to buying a home. We’re going to explore questions on how to save up for a down payment, choosing the right mortgage, and deciding how much home you can afford.

This week’s topic starts off with a question about the differences between a 15 and 30 year fixed rate mortgage.

Today’s question is:

“Should I get a 30-year, or 15-year mortgage?”

 

What’s Better - a 15-year or 30-year mortgage? Transcript:

Obviously a 15 year mortgage is going to save you significantly on interest payments over the life of your loan.

But, that doesn’t always mean it is your best option once you factor in your whole financial picture.

 

Another very underrated element to a 30 year mortgage is the flexibility it provides. You can always pay extra on a mortgage, but you can also always fall back to the lower monthly payment (relative to a 15-year mortgage) if needed.

For example, at today’s interest rates on a $300,000 mortgage, the difference between a 15 year mortgage and a 30 year mortgage is about $700 per month.

A 15 year mortgage, with that extra $700 per month will end up saving you about $125,000 in interest over the life if your mortgage.

But, realize that with a 30 year mortgage you could be saving nearly $700 per month, which if historical stock market returns are anything like the past, will grow to be much more than $125,000.

In additional, if you really decide that paying off the mortgage is the right thing to do – you can always apply that extra $700 per month to the 30-year mortgage and it will be paid off in less than 16 years. So, you can repay the loan in very similar time, but you always have the ability to cut back if needed to save $700 per month. For a lot of people, this is a safety net worth having.

 

In summary, I think a very general rule of thumb is: if a 15-year mortgage is going to prevent you from fully taking advantage of your 401k, IRA, and/or Roth IRA, it is probably not the best idea for you.

Matt Hylland