One important decision homebuyers face is whether
to secure a 30 year, fixed-rate mortgage or go for a
15-year one, which carries a lower interest rate. "All
things equal, a 15-year mortgage allows you to payoff
your mortgage twice as fast while saving a significant
chunk of money on interest," explains Mark Crosby, a
mortgage expert in Wilmington, Del. Still, "I think the
30-year mortgage is a logical choice for most people
because it has more advantages."
For starters, mortgage payments are less expensive
with a 30-year mortgage, enabling more consumers to
qualify for home purchases. "With a 30-year mortgage
you are almost always free to make additional principal
payments necessary to pay off your loan [faster]
without penalty," Crosby says. "With the 15-year loan,
you are committed to giving that extra money to your
lender each month, whether you can really afford to at
the time or not."
Higher payments that come with a 15-year mortgage
make little sense if they keep you from building savings
or contributing to a 401(k) plan, IRA or a college fund,
adds Dan Green, a loan officer with Waterstone Mortgage
in Laurel, Md. "You could be needlessly tying up too
much of your money into your house."
Green said another reason people favor a 30-year fixed
mortgage is the tax benefit. ''This is because the
amortization schedule of 3D-year fixed is back-heavy,
with early-term payments big on interest and light in
principal," he explains. "By contrast, the 15-year fixed is
always light on interest which lowers its taxpayer
benefits."
While it's true you gain more of a tax break from a 30-year
loan, it shouldn't be the main consideration when deciding
on a term. The 30-year borrower pays less in yearly taxes
because he or she pays significantly more in interest.
So it all comes down to choice and circumstances. Choose
the 15-year loan if you have the financial wherewithal to
assume the payments. Your interest savings will be
substantial and you'll own your home faster. Opt for the
30-year loan for lower payments and greater flexibility.
You can always choose to pay more on your mortgage
when the money is available.
