With mortgage rates at or near all time lows again, it’s time to consider the ongoing question, do you choose a 15 or 30 year term? The 15 can be the way to go, especially if you are in your late 30’s or older and have a goal of having no mortgage at retirement. More than that, you’ll get a rate about a half percent lower which can save you some money as I show in this example:
As you can see, the payment required to cut the term of your mortgage in half jumps by just over 40%, all of this extra money going to principal. Another approach you can consider is to take the 30 year term, at the slightly higher rate, and make payments for a 15 year payoff. You need to look closely at your finances and your own risk tolerance to make this decision:
- Is there room in your budget for the higher payment?
- Do you have any credit card debt you carry month to month?
- Are you paying any other installment debt (car, boat, etc.)?
- Are you depositing to your 401(k) at least to capture the full match, if available?
- Do you have 6 months or more of emergency money set aside?
- Are you and your spouse secure in your jobs (as if such a thing is possible these days)?
- Are you expecting a child in the next few years and will lose some income during that time?
For many who are just moving into a house, it’s a better choice to take the thirty year, beef up your financial position, and then begin accelerating your payments. This isn’t rocket science, no complex math, just make extra payment each month to principal, and make sure the back is crediting it that way. For those who are paid bi-weekly, when you see that third check in a month (this occurs twice a year) you may use that money to pay down the mortgage. Another approach, if your retirement savings is on track, is to take half your raise and use that as your pay down money. The idea of having no mortgage is very appealing, but there’s one risk to consider. So long as you have a payment to make, that expense is still there. If I lost my job before the mortgage is paid in full I’d still prefer to have a well funded emergency account vs a mortgage that’s five years from being paid off.
One goal to consider is to pay at a rate that will have your mortgage paid off before you retire. My personal goal is ten years, so with that payment gone, we can reevaluate our retirement savings and increase to a higher level if needed. Or if we feel comfortable retiring early, at least that monthly payment will be long behind us.