Taking the time to consider what type of mortgage is the best for your particular situation can be well worthwhile. Picking the right mortgage can mean the difference in tens or even hundreds of thousands of dollars in savings over the term of the loan. In fact, according to creditloan.com, “After 30 years of making payments, a homeowner with a $240,000 mortgage loan will have paid over $580,000 on his/her house.”
Realizing just how much choosing the right mortgage can save, there were certain questions my wife and I considered before making the decision to take on our most recent mortgage.
What’s our long-term plan?
Developing a long-term plan regarding a home purchase can help you decide which mortgage is right. If you’re looking to build equity faster or looking to build more equity within a shorter timeframe, a 15-year mortgage might be right. If you’re planning to stay put for a lengthier period of time, then a longer-term, 30-year mortgage might work.
In our case, we had a 10-year timeframe in mind when we bought our last home. We wanted to be out of our location before our first child hit high school age. Therefore, since we weren’t planning on making this our long-term home, we felt a 15-year mortgage might be better for our needs.
What’s the difference in cost?
A mortgage can cost a lot of extra money over time due to the interest involved in carrying the loan. So the next question we asked ourselves before choosing a mortgage was what the overall cost difference between a 15 and 30-year mortgage would be.
We were looking at a $165,000 mortgage. The difference in interest rate between our two main loan options was about a percentage point. Therefore, a 15-year fixed rate loan at 5.375 percent meant a total payoff amount over the term of the loan of about $240,000, while the amount for a 30-year fixed rate loan at 6.375 percent would be about $370,000 – a substantial difference. It was hard to deny that we found the money savings involved in the shorter-term loan attractive.
What can we afford?
Of course saving money on a shorter term loan is nice, but it won’t matter much if the monthly payments aren’t affordable. While a shorter-term loan can have plenty of advantages, it can also mean a significantly higher monthly payment.
Being a dual income family with relatively stable income though, we felt comfortable with the higher payment amount (about $300 a month), and felt that the long-term benefits of the shorter-term loan were worth the monetary strain upon our finances. Not only did going with the shorter loan allow us to build equity faster in our home, but when we eventually sold the home and downsized, it helped us afford a smaller, lower-priced home outright.
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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. Calculations have not been verified by a professional. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.