Should you get a 30-year mortgage?
Ask this question and you can get some pretty passionate responses. Some are adamant that a 15-year mortgage should be the only option. Some think that a 15-year mortgage is too restricting. So they recommend the 30-year mortgage.
What should you do? As you would expect, it depends. Before you sign your mortgage agreement, consider some reasons why you should (and should not) get a 30-year mortgage.
Why should you get a 30-year mortgage?
- Lower monthly payment. This is simply a matter of math. If you take out a $200,000 mortgage, spreading the loan payments over 30 years is going to result in lower monthly payments when compared to spreading the loan payments over 15 years.
- Greater ability to achieve other financial goals. Because of the lower payments, you are able to put money toward other financial goals—paying down debt, setting up your emergency fund, and saving for retirement.
- Ability to purchase a more expensive home. The monthly payment for a $200,000, 30-year loan with a 5% interest rate is $1,074. A similar monthly payment ($1,068) for a 15-year loan with a 5% interest rate will get you $135,000. That’s a $65,000 difference. Without impacting your monthly budget, a longer-term loan allows you to buy more house than a shorter-term loan.
Why should you not get a 30-year mortgage?
- More expensive (if you keep it for 30 years). If you only pay your monthly mortgage payments, a 30-year mortgage will cost you a lot more than 15-year mortgage. Consider our $200,000 mortgage with a 5% interest rate. By the time you make the last payment on a 30-year mortgage, you would have paid back $200,000 in principle plus $186,512 in interest. Ouch. For a 15-year mortgage, you would have paid back the $200,000 principle plus $84,686 in interest. That’s $100,000 less than the 30-year mortgage.
- Higher rates. Confession time—Using the same $200,000, 5% mortgage for both a 30-year mortgage and 15-year mortgage is not a very realistic example. The reality is that the 30-year mortgage will probably have a higher interest rate than the 15-year mortgage. So the difference between the cost of a 30-year mortgage versus a 15-year mortgage is even greater than the example above portrayed.
- You can purchase too much. The lower monthly payment of a 30-year mortgage allows you to buy more than you could with a 15-year mortgage. But some take it too far. They buy more house than they need or can afford. They underestimate the costs of owning a home beyond the mortgage payment. They don’t consider the furnishing, utility, maintenance costs. The purchasers end up becoming house poor, where all of their money goes toward the house.
Consider the pros and cons of both mortgage options. Look at your budget. Think about your other financial goals. Think about the costs, beyond the mortgage payment, of owning a house. And determine what type of mortgage works best for you.