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Some financial gurus out there make a valid point about mortgages – 15-year mortgages always pay off in…15 years. So you may be considering why a 30-year mortgage is better in most cases.
It all has to do with risk and protecting your monthly cash flow.
15-Year Mortgage Versus 30-Year Mortgage
It is true that in almost all cases a 15-year mortgage offers a better interest rate than its 20 or 30-year counterpart. However, like FICO scores, there is more to life than a number.
My main concern with a 15-year mortgage is that the mortgage payment is usually significantly higher.
What happens if you get laid off, or you are in a serious accident, and have to make that higher payment?
The answer to that question likely puts you behind on your mortgage, and if that continues you will likely be facing foreclosure.
Not all mortgage decisions are made when buying or building a house. When rates take a nosedive, as they have in recent years, many homeowners begin looking for ways to lower the interest rate on their home loan.
One of the easiest ways to do so is a refinance to a 15-year fixed rate mortgage. While your payments will likely go up, chances are you will enjoy significant interest rate reduction.
The downside is two-fold. First, you will likely have to pay a couple thousand dollars in closing fees, which could wipe out any savings, especially if you wind up selling the home in just a few years.
Second, your monthly mortgage payment will likely significantly increase.
You might say, so what – I can easily afford the payment on a 15-year mortgage.
Not so fast.
Sure it might be easy to make that larger mortgage payment on a good month, but what about when things go south.
The 15-Year Mortgage Alternative
Why not continue paying your 30-year mortgage, but do so like it is a 15-year mortgage. The nice thing about mortgages is that you are ultimately in control of the pace of your payoff plan.
- Make an extra payment once a year
- Add $100 extra principal payment each month
- Sign up for biweekly payments (the equivalent of making one extra payment per year)
This strategy provides you the flexibility to pay extra on your mortgage when times are good and you can scale back to just the normal payment if something goes wrong.
My bank offers an online amortization schedule. I like to print it out each month that we are able to put a little extra on the mortgage so I can see our progress at shaving off additional months from the original payoff date.
You would be surprised how much time a $500 extra payment shaves off a mortgage amortization schedule.
No matter which loan length you decide on be sure to get the lowest rate possible. We have enjoyed a period of historically low rates, which means they can only go one direction.
Lock in a low rate now, or refinance to a lower rate on your existing mortgage and save money.