Because of the present market climate, home appreciation is not a rational motive for owning a home, nor is it a means for acquiring personal wealth. View your home as a long-term place to live and a long term investment.
With that in mind, which fixed rate mortgage should you choose when buying or refinancing a home?
Most standard fixed rate mortgage payment terms range from 10 to 40 years. The most popular terms, however, are 15 and 30 year loans.
The case in favor of 15-year fixed rate mortgage loans
According to bankrate.com, the current 30-year fixed mortgage rate is 4.75% as opposed to a 15-year fixed mortgage of 4.30%. A 15-year loan offers the definite advantages of an early pay off and a substantially reduced amount of interest paid during the term. For example, on a $200,000 loan, a 15-year mortgage could save more than $100,000 over the term of the loan when compared to a 30-year mortgage. An additional advantage is that the interest rate is generally slightly lower with a 15-year mortgage. The difference between the two are 1/4 percent to 1/2 percent depending upon current market conditions.
A 15-year fixed mortgage is best suited for those with upward employment mobility who are buying well below their means or those refinancing a home with substantial equity or significant cash reserves.
15-year mortgages have great advantages over 30-year mortgages because they have shorter payment term, lower interest rate, and rapid equity build up.
Because of the shorter term, the monthly payment in 15-year mortgages is significantly higher than that of the 30-year mortgages; so much that it is out of reach for most home buyers. Although it costs $100,000 more in interest over the life of the loan, the monthly payments are lowered by at least $400 per month on a 30-year mortgage. The flexibility of making extra principal payments on a 30-year mortgage gives the option to pay it off early and to gain big savings on the interest.
Any unforeseen financial setbacks or job loss can cause the monthly payment on the 15-year mortgage to become a serious burden. Therefore, it is important to have a size-able savings account to mitigate the risks. If a borrower does not have extra savings, it is better to opt out for the 30-year mortgage in order to build your savings. Or else, the only recourse is an expensive refinance to a 30-year mortgage which only works if the borrower’s qualifications have not been compromised by the negative events.
When it comes down to it
If you can afford a higher monthly payment and have a significant savings fund, a 15-year term may be the better option. Fifteen years is not very long time over a lifetime, thus making the equity in a home with no mortgage a positive contribution to your retirement. But, if your objective is to save more monthly, then avoid the 15 year mortgage because of the higher monthly payments. So, if you have an appetite for debt and risk, the money saved every month with a 30-year term can be invested elsewhere to gain higher returns.
You have to decide if it is more important for you to own property at a quicker rate or if you would rather invest the extra income elsewhere in order to receive greater returns.
Prospect Financial Group
948 Garnet Avenue
San Diego, CA 92109
NMLS: 349089 | BRE: 01837707