If you are planning on buying a house soon, you have realized that there are more decisions to make than just “What house?”.
You will need to decide how you plan on financing the loan. The two main options that are usually presented to you are a 15-year mortgage and the 30-year mortgage. A 15-year mortgage has many benefits; APR rates are lower, you pay substantially less interest, and payments stop 15 years early! This is all off-set by paying more monthly.
Here is the questions you need to ask yourself:
Can you easily afford the payments of the 15 year mortgage?
If you take out a 15 year mortgage, would you have enough cash on hand to keep up with your lifestyle without building debt at higher interest rates on credit cards, student loans, car loans, etc?
Do you feel like your financial situation won’t change in the next 15 years?
Examples: Are you planning on having children? Will a 2-income household become a 1-income household if you do have children?
Many people take out a 30-year mortgage and plan on making extra principal payments every month so that it will be paid off in 15-years or so. This gives them the historically low fixed rate for a longer time and is easier to pay in months of financial crisis. However studies show that the average household doesn’t have the perseverance to continuously pay off extra each month.
Are you retiring soon?
The average age of a person taking out a 15-year mortgage is 40 years old according to USAToday.com. These people are closer to retiring and don’t want to be paying a mortgage into retirement.
Are you an investor, or want to be?
Some still choose a 30-year mortgage even if they can easily afford a 15-year mortgage. This is because it is “cheap money”. Today’s mortgage rates are low enough that many choose to invest their extra income into stocks, bonds, mutual funds, etc., because the average annual return on their investment is higher than what they are paying in interest. This is a perfectly legitimate strategy, however, it is not without risk! Especially after the recent recession, many feel having the deed to their house framed on their wall is priceless!