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Why a 30-Year Mortgage Might Be Your Best Bet

Choosing a mortgage is one of the most stressful things about buying a home. With interest rates on the rise, many wonder whether a 30-year mortgage is really their best option, especially when lower rates are available on shorter-term 15-year mortgages.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at when a 30-year mortgage might make the most sense. Dan notes that 30-year mortgages give you maximum flexibility, retaining the right to make larger payments when you can while not having to make big payments when you can't. With Wells Fargo (NYSE: WFC  ) , Bank of America (NYSE: BAC  ) , and other lenders imposing tougher lending guidelines than before the financial crisis, a 30-year mortgage might maximize your chances of getting approved. In addition, Dan notes that having a longer-term mortgages frees up more investment money for use in IRAs or 401(k) retirement accounts, where you might actually earn better returns than you'd get from paying your mortgage back early.

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Read/Post Comments (8) | Recommend This Article (6)

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  • Report this Comment On January 13, 2014, at 9:17 AM, sabebrush6 wrote:

    You should ALWAYS shoot for a 20 or 25 year mortgage if at all possible. A 25 year is only a few dollars more than a 30 year and costs you a bundle less. Common sense.

    Always stay within YOUR budget, not the budget the Real Estate agent says you can afford.

  • Report this Comment On January 13, 2014, at 10:23 AM, Hman111 wrote:

    I completly dissagree. A 30 year mortgage should only be considered, if you have NO OTHER CHOICE.

    No matter, how much interest you can deduct on taxes, and how high of gains you can get by "investing the difference". There is no way to slice paying an additional $100,000 in interest, and making 15 more years of payments. The ONLY party that benefits is the BANK.

    I have only 1 year left on my 15 year loan, 95% of payments now go to principle. If I had gotten a 30, I would be 65 by the time I paid it off. (another 15 years)

  • Report this Comment On January 13, 2014, at 11:15 AM, jlclayton wrote:

    We bought our current property with a 30 year mortgage with an interest rate of 4.375. A year later we had the opportunity to convert to a 15 year mortgage with an interest rate of 2.75 and minimal closing costs. Even though we could have refinanced for another 30 years and still lowered our rate, we jumped at the great deal on the 15 year mortgage with no hesitation. The gains we may be able to make investing the extra money are not guaranteed and the interest may or may not be enough during those last several years to make a difference on your taxes.

    If someone is deciding between a 15 and 30 year mortgage and decides to take the 30 so they can invest more in their retirement, a better strategy is to realistically look at whether you are overbuying what you really need for a house. For many people that I know, they buy the biggest "dream home" they can qualify for with a 30 year mortgage instead of saving the money for investing in retirement. Purchasing a home that they can afford with a 15 year mortgage while still being able to save an adequate amount for retirement is the smartest decision, but that's hard to do when a 2500 sq ft dream home is considered a need instead of the 1800 sq ft home that would easily work for them. Those who are disciplined with money enough to make the extra payments every month and put all of the extra money in savings are probably the ones buying houses they can realistically afford in the first place.

  • Report this Comment On January 13, 2014, at 12:23 PM, SkepikI wrote:

    Over my 34 years as a homeowner, I've had 30, 15, fixed and variable 5/1 mortgages. BECAUSE those were each the "sweet spots" for my peculiar situation at the time. While I NEVER watch videos without transcripts (lazy, Dan...) I sincerely doubt there was enough in this one to cover all the circumstances that might push one in a particular direction. Upwardly mobile, horizontally nimble (ie likely to move a lot) find a short end sweet spot if you can handle it, for instance. Near to retirement and interest rate deduction likely to be less important? Maybe a 30 is not for you. STUCK in one spot likely for 20 years? Well maybe a 30 is your ticket. And I could go on and on for peculiar to YOU circumstances- and just the ones I've experienced myself.... Theoretically, you could have lots more that I've never faced as an individual.

    And Dan, I REALLY REALLY wish the editors at MF would BAN "articles" that are mostly videos with no transcript.

  • Report this Comment On January 13, 2014, at 3:36 PM, ETFsRule wrote:

    "No matter, how much interest you can deduct on taxes, and how high of gains you can get by "investing the difference". There is no way to slice paying an additional $100,000 in interest, and making 15 more years of payments."

    This is objectively incorrect. If you can invest the money instead and make a 6% return, you will end up significantly more wealthy than if you had made additional payments on a 5% mortgage.

  • Report this Comment On January 13, 2014, at 4:09 PM, CyrusTev wrote:

    Just because you take out a 30 year mortgage doesn't mean you can't easily do the math with an online calculator and figure out what you need to do pay each month to pay it off in 15 years. It just takes a little discipline. By having a 30 year mortgage you will be ready if some of life's little surprises jump up and bite into your cash flow.

  • Report this Comment On January 13, 2014, at 4:24 PM, valari25 wrote:

    Videos without transcripts are garbage. Stop being lazy.

  • Report this Comment On January 14, 2014, at 10:23 AM, dtam1 wrote:

    even better, don't invest and buy lottery tickets, "where you might actually earn better returns than you'd get from paying your mortgage back early."

    getting a 30 year mortgage with the intent of paying it off in 15 years is one of the dumbest things I've ever heard CyrusTev. Flexibility is nice, but how about planning on having an emergency fund for those "little surprises" instead. worst case scenario if you really are underwater is refinance the house with a 30 year and take equity out. why bother paying the higher interest rate if you have a "little discipline"?

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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