When you are purchasing a home, you will come to the option to either take out a 15-year mortgage or a 30-year mortgage and you may be wondering which option is the best scenario. The biggest difference between the two is that 15-year loans have higher monthly payments, but you pay less interest over time. Thirty-year mortgages have lower monthly payments, but you pay significantly more for the home in the long run. This kind of decision should be based off more than just the numbers though. Here are a few other things to consider.
Do You Need Wiggle Room?
First, there is the option to take out a 30-year term loan and pay it off in 15 years. This is a good option to have a little wiggle room so that if you couldn’t make a payment one month or if you needed some extra cash, you wouldn’t miss a payment and you wouldn’t default on the loan. You really need to look at your finances and determine what you can afford to spend monthly on a mortgage this can help you decide between taking a lower 30-year mortgage payment or a higher 15-year mortgage.
What Does Your Emergency Fund Look Like?
Once you sign the loan paperwork, you will have to make a monthly payment each month. If you take a 15-year term with a higher payment, you should ideally have a well-built savings account in order to ease risks if a major expense happens or if you lose your job. If you do not have a substantial savings account, a 30-year mortgage will work better for you.
How Comfortable are You with Debt?
Managing debt is not easy. How soon do you want to pay off your mortgage? If you don’t like the idea of having debt that is a 30-year commitment, you should go with the 15-year mortgage. Although, if you are hesitant to commit to higher payments you should not take out a 15-year mortgage.
You do get more of a tax break from a 30-year loan, but this should not be the main factor in deciding on a term. A borrower who takes a 30-year mortgage loan out will pay less in yearly taxes than the 15-year borrower, but the 30-year borrower will pay significantly more in interest.
What Option is Best for You?
Your financial situation will determine which mortgage term is right for you. If you can make a higher payment, have solid savings and can meet retirement and other savings goals you have, a 15-year mortgage is ideal as you will own your home in half the time and will pay less in interest.
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