Is a 15 Year Mortgage Right For You

2006-09-29

Contemplating on owning a home? Are you having a hard time choosing between a 15-year or 30-year mortgage option? Well, before taking the deep plunge, here are some important things to consider.

The basic premise between these two mortgage options is that: with a 15-year mortgage option, your monthly payments will be higher, but the interest rate over the years will be lower which offsets part of the increase in the monthly payment; and with a 30-year mortgage option, you get lower monthly payments which means you can spend the money you save on some essential projects, but you also pay more interest over the life of the loan.

To really decide which type of mortgage is best for you, there are a variety of factors to take into account.

First consideration would be your financial capability. Ask yourself this question, “How much can I afford to pay on a monthly basis?" Analyze seriously your current financial status. If you can afford to pay off your mortgage in 15 years, then it is basically ideal to go for this option. If you think, however, that you will have to give up some necessary comforts in life, and some leisure activities should take into a backseat, and you may perhaps feel that it is unfair for you to suffer miserably paying for a high 15-year mortgage, then by all means, go for the easier and longer payment scheme.

In considering your financial status, remember that your home’s mortgage payment is only a small part of your living expenses. You should also budget for food, clothing, medical expenses, recreational activities, insurances, taxes, and your house's general upkeep.

The option to get a 15-year mortgage is for those more financially equipped and stable. The 30-year mortgage, on the other hand, is more suitable for those who are just starting to have a career take-off or first-time home owners.

The 15-years mortgage option, for some may be a great opportunity to save large sum of money in the long run and channel these funds to other long-term projects. But to some, they might consider the 30-year mortgage option and save the difference in monthly payment into a savings account or money market account. This option is advantageous to individuals with a tremendous discipline and willpower of consistently setting aside the amount every month and just let it stand for up to 15 years. These individuals must be willing to invest the money in tax-deferred investment plan or stocks that have high-expectancy return above the mortgage rate. So assess yourself, what are the chances that you will save this amount yourself in 15 years, given the demands on your finances.

Take also into the consideration the tax deduction. Mortgages are tax deductible. The rate of deduction is based on the tax bracket you belong. So calculate how much you can save in tax given the option of a 15-year mortgage versus a 30-year mortgage. To assess your tax deductions, take special notice that the higher tax bracket you belong, the better for you to opt for a 30-year option to make use of your tax deduction privilege longer.

Therefore, the 30-year mortgage option is likewise more beneficial to home buyers in the highest tax brackets and purchasing expensive homes and have plans of occupying said home for a long term.

In summary, a 15-year mortgage option:

* Means you can own your own home in half the time.
* Will save you more than half the amount of interest compared to the 30-year mortgage option.
* Offers lower interest rates than the 30-year mortgage option and this interest rate stays the same throughout the life of the mortgage.

On the other hand, a 30-year mortgage option:

* Means you pay lower monthly payments.
* Will let you have more freedom with your finances and can spend some money on leisure activities or other projects.
* Can let you invest the money you save on your monthly payments to investment plans, stocks, etc.
* Is more favorable for home buyers in high tax brackets purchasing relatively expensive homes.
* Is preferred when mortgage rates are relatively low and the spread between 15-year and 30-year rates is relatively small.

But in the end, whether you opt for a 15-year or 30-year mortgage, you are in a win-win situation because the fact remains that your home a very worthwhile investment, a real gem in its truest sense.

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