Want to save hundreds of thousands of dollars over the life of your mortgage? Are you willing to sacrifice a fancier lifestyle to support a philosophy of savings and frugality? If so, consider the 15-year mortgage.
Conservative, interest-averse borrowers love the 15-year mortgage for a variety of reasons. But the biggest – by far – is the lower interest rate, which accomplishes two important goals. Debt-fearing consumers hate unnecessary interest expenses, and 15-year loans pay off principal balances quickly. That means in 15 years, no more house payment – while your 30-year counterparts are only halfway done. Imagine the freedom of buying real estate when you’re 30 and winding up free and clear when you’re 45.
Think carefully before you race off to your loan officer, however. Payments on 15-year mortgages are much higher than payments on the same principal borrowed over 30 years, even with lower interest rates. Can your budget manage a housing payment that’s about 50 percent higher?
Consider also your job security and rate of savings. Do you work in an industry with stable employment and do you have at least six months’ expenses set aside for emergencies? How’s your retirement plan looking? If you’re excited by the prospect of 15-years-and-done but you haven’t yet addressed these areas, explore more options.
Some borrowers take out 30-year loans and pay them off in 15 years. They reap the tax benefits of the higher interest rate on the 30-year but reduce their interest by consistently making extra payments. While the vast majority of borrowers don’t have enough discipline to stick to this plan, it’s an option if you’re concerned about job security or want to ramp up your retirement savings.
Are you willing to commit to living beneath your means? If so, the 15-year mortgage is your loan.
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