Mortgages: When Time is Money

The 30-year mortgage is the traditional, most common loan, especially when buying a first home. After all, that’s how your parents and grandparents financed their homes, right? Many young homebuyers might be surprised to know there’s another option and the benefits are plenty if they take advantage of it: the 15-year mortgage.

The monthly premiums on a 30-year loan are lower — that seems to be the most practical reason to apply for and commit to a mortgage that will take three decades to pay off. But time, as they say, is money. Paying off your mortgage in 15 years means paying less total interest and despite the higher monthly payments, the overall cost of your house ends up lower than it would be with the 30-year option.

Aside from the obvious shorter term, there’s another reason a 30-year mortgage costs you more. Fifteen-year loans are less risky for banks and that means they come with a lower interest rate. The difference for homebuyers can be anywhere from a quarter of a percent to a full percent less and paying that back over decades will add up.

One choice you can make if a 30-year mortgage is more suitable to your financial situation, as we’ve talked about before, is to shave years off your mortgage by making additional payments. Paying more every month — by either adding to what’s due every month or even paying twice a month instead of once — will save you money on interest. As long as your mortgage lender doesn’t have an early payment penalty, you are entitled to directing the extra monthly payments to the principal. Commit to doing that consistently and you will pay the mortgage off in half the time.

If finances get tight, you can always fall back to the regular, lower payments of the 30-year schedule. That’s the warning many financial experts will give you. Life happens. Even with the best of intentions, other expenses and priorities could keep you from making those extra payments. Consider these other simple ways to save money on your mortgage.

Another reason to opt for the 15-year mortgage is to pay off your house in advance of retirement. That’s a more relevant point to consider if you plan to retire in 10-20 years after your home purchase. On a fixed income, it makes sense to try to eliminate your mortgage from your monthly expenses.

If you’re still not sure you can manage the 15-year mortgage, don’t discount the advantages of the traditional mortgage schedule. The lower monthly payment over 30 years could allow you to buy a bigger house than you would be able to afford with a 15-year loan. That’s because 30-year loans are typically larger. The subsequent lower payment will give your personal finances some breathing room and allow you to build up a savings or spend money on other things.

Consider all of the options your mortgage lender offers before you decide on the best fit for you and your family. No matter which kind of loan you settle on, the same rules apply that will determine your qualifications, including a good credit score, the amount you can provide as a down payment, and debt-to-income ratio.

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