Making the call as to whether to go with a 15-year or 30-year mortgage can be a major financial decision. It can affect a variety of factors when it comes to personal finances and the overall success or failure of a home ownership experience.
Personally, when our family had to make this decision, there were several questions we asked ourselves. Doing so not only helped us make the decision that was right for our mortgage needs, but it helped us save thousands of dollars on the overall cost of our mortgage.
How much more would our monthly payment be?
The difference in monthly payment can be significant between a 15 and 30-year mortgage. Even though the 30-year loan interest rate is typically higher, the shorter payoff time of the 15-year term tends to push the payment with such a mortgage higher. In fact, with our mortgage, the difference was over $300 a month between the two.
Are the long-term benefits worthwhile?
But with mortgages, sometimes it takes a longer-term outlook to determine which one is the best option. Using a mortgage amortization schedule or mortgage calculator can help figure out how much a loan will cost over the long run both in total as well as broken down between interest and principal.
After conducting such calculations ourselves, we found that the difference in interest between a 15-year loan (about $75,000) and a 30-year loan (about $205,000) was a whopping $130,000!
Is our income secure?
But it’s probably not the best idea to go for a higher monthly payment if income isn’t stable. As a self-employed individual, my income is anything but stable; however, having a wife who works in health care helps to balance my income instability. But what if something should happen to her or her source of income?
What would happen if our income was cut or disappeared completely?
Since my wife is the breadwinner in our home, it behooved us to ensure that if we were considering taking on a higher mortgage payment that I would be able to cover it if something were to happen to her income. Therefore, we pushed our emergency fund higher just in case in order to help supplement my lower income should something happen to her so that I could continue to make our regular mortgage payments.
How long could our reserve carry us?
But what if we should have to go for an extended time without a regular and consistent income? How long could we go?
It was an important aspect to consider, especially since this was right before the housing market collapse when we saw that it was a question not enough people had considered. However, we knew at the time that we could make it several years on my income alone, and more than a year without any income at all, so we felt comfortable with going with the shorter term loan to recognize the significant long-term benefits.
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The author is not a licensed financial, real estate or mortgage professional. This article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.