Information on 15 vs 30 year mortgage terms, and which is the best choice for you.
There are three major items to consider when choosing between a 30 year and 15 year mortgage term.
1. What payment can you qualify for?
The payment you can qualify for is determined by your debt to income ratio. Your total housing expense should not exceed 40% of your net spendable income. Net spendable income is gross income less taxes. Your mortgage payment and interest rate will be higher for the 15 year mortgage but you can save tens of thousands of dollars in interest over the life of the loan. As an example, on a $100,000 loan at 7 % interest rate you will pay $61,789.09 in interest for a 15 year term and $121,658.19 in interest for a 30 year term. If qualifying for the 15 year loan is questionable you may want to go with the 30 year mortgage. Your monthly payment and interest rate will be lower on the 30 year loan. Keep in mind that the interest you pay over the life of the loan will be considerably higher with the 30 year loan.
Another factor to consider is the amount of the mortgage payment you want to be committed to on a monthly basis for 15 or 30 years. Once you accept the mortgage payment and terms you are locked into that payment for the length of the mortgage unless you refinance.
You should not take a 30 year mortgage with the intent of refinancing to a 15 year term if you have any serious doubts about future income potential or job security. Your plan to refinance the loan may fall through if your income or credit has been adversely affected since you took the original loan.
2. Is the tax write-off for interest important to you?
If you itemize your federal taxes you can claim mortgage interest expense which will reduce your taxable income resulting in a lower tax bill. Of course, if you don’t itemize your taxes and are able to pay cash for your home, you should. If you do itemize your taxes and want to maximize the tax write-off, go with the 30 year mortgage. The longer mortgage term will result in the higher interest expense over the life of the loan and therefore the greater tax write-off.
3. How long do you want to be in debt?
Do you plan to build equity quicker by paying off the mortgage sooner than its maturity date? If you plan to pay off the mortgage early the most cost effective way to do that is with a 15 year mortgage. You will incur lower interest charges this way. Make sure you have a mortgage that does not impose a penalty if you pay it off prior to the maturity date.
If you are uncomfortable with the payment on the 15 year mortgage, you can take the 30 year mortgage and make a larger than minimum payment each month. If you divide the mortgage payment by twelve and add one-twelfth of the payment to each minimum monthly payment you will pay off your 30 year mortgage in 22 years. This will save you interest expense while not locking you into the higher mortgage payment on the 15 year loan. You will be grateful for this lower minimum mortgage payment if your financial situation suddenly changes for the worse.
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