By Julie Jardine-Potratz, Mortgage Loan Officer
Your dream home has just come up on the market. You’re comfortable with the selling price, you speak with your mortgage loan officer and everything is in order. The only thing you need to decide on is if you should you take out a 15 or 30-year loan. There are pros and cons to both! Your goals and financial road map will help guide you into making the right choice for you and your family.
Employment, income, assets, credit and debt are evaluated by your lender to determine your risk factor. If your debt ratio is elevated, you may only qualify for a 30-year because a 15-year mortgage may increase your monthly payment past the allowable debt threshold. However, if you meet all the requirements for either loan, you still have a decision to make. Your age can often assist you with your decision. If you are young and years from retirement, a 30-year mortgage makes a lot of sense. You’ll have a lower payment which will free up money for you to invest in other ways. If you have children, you could start contributing to a Coverdell Education Savings Account (CESA) or invest for your retirement. Having the lower payment that is derived from a 30-year loan may be less stressful financially, but if you’re older and have substantial assets allocated for retirement, you may benefit from paying off your home in a shorter time frame and avoid having a mortgage payment in retirement.
The following example is a $200,000 loan with a rate of 3.75% over 30 years. The monthly principle and interest (P&I) payment is $926. If you chose the 15-year loan, you would have a lower interest rate, say 3.25% but your monthly P&I payment would be $1,405 per month. A difference of $479 more per month. While your payment is much lower on the 30-year loan, you pay more interest over the life of the loan, because you are making 180 more payments. Using this example, you would pay $133,443 in interest. If you decided on the 15-year, you would be locked in with the higher monthly payment but you would only pay $52,960 in interest; significantly less than that of the 30-year loan.
A 15-year loan may be the right decision if you have a good financial portfolio in place, but make sure you take a look at the big picture. Halfway through your 30-year mortgage, you would still owe $127,365. If you took the freed up money of $479 and made monthly payments to a Roth IRA that had a 6% average rate of return, you could be looking at a return of $456,506 at the 30-year mark. Your house would be paid off and you would have close to a half million dollars saved. Another advantage of the 30-year loan is that you would have liquid money available in case of an emergency. The money paid into your home isn’t liquid. In order to get to it, you must refinance or sell the home.
Make sure you go over your financial situation with your loan officer before making the decision. Our team will help you decide on a solution for you and your family. Call 877.312.9033 to get started.