15 or 30 Year Mortgages
Which is Best?
After you've decided which type of mortgage -- fixed or
adjustable -- you want, you may think that your mortgage quandaries are behind you.
Unfortunately, they're not. You also need to make another important choice -- typically
between a 15-year and a 30-year mortgage. (Not all mortgages come in just 15- and 30-year
varieties. You may run across some 20- and 40-year versions, but that won't change the
issues we're about to tackle.)
If you're stretching to buy the home that you want, the choice of
how long-term your mortgage will be may very well not be yours to make. You may be forced
(we should say forcing yourself, because you choose what home to buy) to
take the longer-term, 30-year mortgage. Doing so isn't necessarily bad and, in fact, has
advantages.
The main advantage that a 30-year mortgage has over its 15-year
peer is that it has lower monthly payments that free up more of your monthly income for
other purposes, such as saving for other important financial goals (such as retirement).
You may want to have more money so that you aren't a financial prisoner to your home and
can just have a life! A 30-year mortgage has lower monthly payments because you have a
longer time period to repay it (which translates into more payments). A fixed-rate 30-year
mortgage with an interest rate of 7 percent, for example, has payments that are
approximately 25 percent lower than those on a comparable 15-year mortgage.
What if you can afford the higher payments that a 15-year
mortgage requires? Should you take it? Not necessarily. What if, instead of making large
payments on the 15-year mortgage, you make smaller payments on a 30-year mortgage and put
that extra money to productive use?
If you do, indeed, make productive use of that extra money, then
the 30-year mortgage may be for you. A terrific potential use for that extra dough is to
contribute it to a tax-deductible retirement account that you have access to.
Contributions that you add to employer-based 401(k) and 403(b) plans (and self-employed
SEP-IRAs or Keoghs) not only give you an immediate reduction in taxes but also enable your
money to compound, tax-deferred, over the years ahead. Everyone with employment income may
also contribute to an Individual Retirement Account (IRA). Your IRA contributions may not
be immediately tax-deductible if your (or your spouse's) employer offers a retirement
account or pension plan.
If you have exhausted your options for contributing to all the
retirement accounts that you can, and if you find it challenging to save money anyway, the
15-year mortgage may offer you a good forced-savings program.
If you elect to take a 30-year mortgage, you retain the
flexibility to pay it off faster if you so choose. (Just be sure to avoid those mortgages
that have a prepayment penalty.) Constraining yourself with the 15-year mortgage's higher
monthly payments does carry a risk. If you fall on tough financial times, you may not be
able to meet the required mortgage payments.
This Homebuyers Tip was excerpted from
Home Buying For Dummies, by Eric Tyson, Ray Brown. © 1997 by
Eric Tyson, Ray Brown, used by permission of IDG Books.
ISBN#: 1568843852
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