This is a guest post from Rainier Fuclan, who works in marketing for New American Funding, a Fannie Mae Seller/Servicer, FHA Direct Endorsement – HUD Approved, and VA Automatic mortgage banker offering home owners a variety of loans including 30 Year Fixed Rate Mortgages, Adjustable Rate Mortgages, FHA Mortgages and more.
Making A 15 year Mortgage Work In Your Favor
With the economy on the rebound and the housing market still hurting, interest rates on home mortgages are at historic lows. Though the conventional 30 year mortgage still makes the most sense for many homebuyers, 15 year mortgages are becoming increasingly more common for first time homebuyers and for owners looking to refinance at attractive rates. Here are a few ways that you can decide if a 15 year mortgage is right for you and how you can take advantage of historically low interest rates.
The Differences Between A 15 Year Mortgage and a 30 Year Mortgage
The main difference between a 15 and 30 year mortgages – besides the loan term- should be pretty obvious. Rates on 15 year fixed rate mortgages have dipped below 2.9 percent, while 30 year mortgages are hovering above 3.6 percent. While this means that you’ll be responsible for higher monthly payments, you’ll also see drastically reduced interest payments over the life of the loan. The shorter term can be very attractive, especially to first time homebuyers, but it’s very important to do some critical thinking about where you’ll be in 15 or 30 years to make the most informed decision.
How A 15 Year Mortgage Can Benefit You
Barring any refinancing or other loan changes, you will own your home free and clear in 15 years, and you’ll have equity in your home well before you would with a 30 year mortgage. A 15 year mortgage can be a great fit for two particular sets of homebuyers: younger buyers with higher income and older buyers who are looking to fully buy a house before they retire.
article continues below …
For younger buyers, choosing a 15 year fixed rate mortgage from a direct lender like New American Funding can allow them to fully pay off their home before their children start college, meaning they can focus on paying for school without the extra burden of a mortgage payment. While the higher payments will require you to have sufficient income to safely meet your loan obligations, over the life of a $300,000 mortgage you will save more than $140,000 in interest payments.
If you are a bit more set in your life, the shorter term mortgage can be a great benefit for homebuyers looking forward to retirement. Being able to have your house paid off before retirement is one nice perk, but there are also tax incentives to consider. Many might advocate for the 30 year mortgage, since you’ll be able to deduct the interest payment from your taxes, but the 15 year mortgage still has advantages. While your yearly taxes may be more, over the course of the loan the 30 year borrower will still pay 2.5 times as much in taxes according to Credit Karma.
Things to Consider Before Choosing A 15 Year Mortgage
The 15 year mortgage is also a great option for homeowners looking to refinance, and according to some experts this may be the last opportunity to refinance at current low rates . And many homeowners are taking advantage. In 2007, for example, only 11 percent of refinances were 15 year mortgages. In the first quarter of 2012, more than half used 15 year mortgages. However, there are some things you should consider to make sure that choosing a 15 year mortgage – whether for buying or refinancing – is the right choice for you.
- Make sure that the payments are manageable. With our $300,000 mortgage, monthly payments at current rates will be near $2,043, more than $600 higher than those for a 30 year loan. It’s important to plan your future carefully to ensure you can meet those payments
- Consider your tax burden carefully. The 15 year mortgage can give you much greater financial freedom in the future, but cutting your interest payments each year will also cut your tax deductions. If you can handle current tax hits for the reduced long term burden, the 15 year mortgage can be a great benefit.
- Don’t let the goal of home equity and paying off your home early take precedence over your other financial goals, like retirement planning and college funding for your children. Having equity in your home can be a great financial tool to have, but it should not be the only one in your toolbox. Make sure all your goals can work together for long-term financial health.