A common belief among homeowners for decades was that they would always have mortgage payment. The Great Recession has caused many individuals to rethink that concept and make plans to get their home paid for sooner.
For people who can afford it, shorter term mortgages will provide a lower interest rate and build equity faster. A 3.09% 15-year fixed-rate mortgage compared to a 3.87% 30-year loan will have a $562.42 higher payment.
The equity would be $66,903.04 greater on the 15-year term at the end of seven years. Even after you consider the higher payment on the shorter term, the equity difference is still almost $20,000 greater.
By choosing a 15-year loan, a borrower is committing to the higher payment for the term of the mortgage in exchange for a slightly lower interest rate. Another approach would be for the borrower to acquire a 30-year mortgage and make payments as if it were on a 15-year term. The slightly higher rate would allow the borrower the flexibility of not having to make the higher payment in the event he could not afford it on any particular month.
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ReplyDeleteAnother way of looking at the advantage of the 30 year at 3.87% is to contemplate that this rate is still close to being at historically low rates. While average saving and investing returns are also low, the chances of inflation returning will serve to increase both savings and investing returns. As a result the spreads between the historically low 30 year mortgage rates and the inflation fueled saving rates will be much greater. If you are a disciplined investor, in 15 years you most likely be able to reap saving returns that allow you pay off the 30 year mortgage and provide a premium.
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