You generally have two options to choose from when applying for a mortgage: You can get a 15-year loan or a 30-year loan.
There are benefits and drawbacks to going both routes. With a 15-year loan, your monthly payments are higher than what they would be with a longer-term loan. As such, a 15-year mortgage could be more difficult to keep up with. On the other hand, a 15-year mortgage lets you shake your housing debt sooner, and you'll generally pay less interest on a 15-year loan for two reasons:
- You'll snag a lower interest rate on the sum you borrow.
- You'll carry that debt for less time.
Meanwhile, with a 30-year mortgage, your monthly payments will be lower than what they'd look like with a 15-year loan. On the flip side, that debt will hang over your head for twice as long, and you'll end up spending more money on mortgage interest throughout the life of your loan.
These days, the 30-year mortgage is particularly popular because interest rates are historically low. As such, many homeowners don't feel the need to push themselves to keep up with a 15-year loan when a 30-year loan is so affordable. But if you're first buying a home when you're older, then it pays to consider getting yourself a 15-year mortgage for one big reason: Doing so will increase your chances of paying off your home before retirement.
The importance of entering retirement mortgage-free
Many seniors retire on a fixed income consisting largely of Social Security benefits. As such, it's extremely helpful to kick off retirement with as little debt as possible -- even the healthy kind, like mortgage debt.
Now if you buy a home in your 30s and take out a 30-year loan, you'll be well on track to have that property paid off by the time your career comes to an end and the paycheck that goes with it disappears. But if you first buy a home at age 50 and take out a 30-year loan, there's a good chance you'll be paying it off well into retirement. And that could constitute a significant financial strain.
On the other hand, if you buy a home at age 50 and take out a 15-year loan on it, you'll have that home paid off by age 65 -- right when Medicare eligibility kicks in. And that's a much more financially secure way to begin retirement.
One compromise to consider
Many people can't easily afford the monthly payments that come with a 15-year mortgage. If you're worried about swinging those higher payments, take out a 30-year mortgage but make a double payment each month. If you encounter a period of higher bills or unplanned expenses, you can always revert back to your lower payment under your 30-year payoff agreement. But that way, the option to pay less is on the table.
Don't compromise your savings
While there are benefits to taking out a 15-year mortgage when buying a home a bit later in life, if your higher monthly payment creates a scenario where you don't have money left over to sock away for retirement, then accelerating your property’s payoff isn't worth it. You need independent savings going into retirement, and if you sign up for too high a mortgage payment, you could end up harming your long-term finances more so than helping them.
One final note: If you're planning to sell your home before retirement, and you only plan to live in it for a short while, then a 30-year loan could make more sense. In that scenario, the pressure to pay off your home before your career draws to a close is off. So, you might as well take advantage of the financial leeway that comes with having lower monthly payments.
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