Chances are, when you set out to buy a home, you won't be able to purchase it outright. Rather, you'll come up with some money for a home down payment, and you'll finance the rest by taking out a mortgage.
Mortgages come in different varieties, and the 30-year term is the most popular. But should you get a 30-year mortgage? It depends on your circumstances.
The benefits of a 30-year mortgage
When you take out a 30-year mortgage, you get three decades to pay back that home loan. Now, you could sign up for a 15-year mortgage and cut your repayment period in half, but in doing so, you'll be liable for much higher monthly payments on that loan. The advantage of a 30-year mortgage is that it'll help you keep your monthly payments lower, thereby making it less likely that you'll fall behind. And that's a good thing, because if you fail to keep up with your mortgage payments, you'll risk losing your home to foreclosure.
Another benefit of taking out a 30-year mortgage is that you'll free up your money for other purposes. If your monthly payment is half of what it would be compared to a 15-year mortgage, you can take that remaining cash and use it to invest, whether it’s in stocks, bonds, or REITs. You can also use that money to fund whatever other goals are on your list.
Furthermore, the longer you carry a mortgage, the longer you’re entitled to tax breaks in the form of a mortgage interest deduction. Granted, you get the same break for a 15-year mortgage, but a 30-year loan spreads it out over a longer period of time, which may be helpful from a tax perspective.
Furthermore, a 30-year mortgage means you'll drag out the repayment process, and have that debt hanging over your head for a long time. This can compromise your ability to pay off your home in time for retirement.
Finally, it'll take longer to build equity in your home with a 30-year mortgage than it will for a 15-year mortgage. Equity is the portion of your home that you actually own, and it's calculated by taking your property's value and subtracting your mortgage balance. With a 15-year loan, you're paying into your mortgage's principal more quickly, thereby accelerating the accumulation of equity, which you can then borrow against in the form of a home equity loan or line of credit as needed.
Is a 30-year mortgage right for you?
Now that you understand the pros and cons of a 30-year mortgage, you'll need to see if getting one is the right move. One easy way to determine what type of mortgage to get is to review your budget and see how much you can afford to pay each month. Make sure you take into account the additional housing expenses you'll face outside of your mortgage payment, like property taxes, insurance, maintenance, and repairs.
If you can't swing your payments under a 15-year loan, then you have your answer -- a 30-year mortgage makes sense.
You'll also need to think about your financial goals, and how your mortgage payments might impact them. For example, if you expect to start saving aggressively for your kids' college expenses shortly after closing on your home, then it might pay to take out a 30-year mortgage so that you have enough money to do so.
The interest rate you get on your mortgage should factor into your decision, too. If you get stuck with a higher rate, which might happen if your credit isn't great, then the less time it takes you to pay off that home loan, the better. But if you're able to qualify for a relatively low rate, then you may not mind the idea of paying it off over a longer period, and then, you can free up more money for other things along the way.
Remember, too, that if you do decide to take out a 30-year loan, there's always the option to accelerate your repayment schedule by putting extra money into your mortgage as and when you have it available. In doing so, you might knock out that home loan in, say, 20 or 25 years as opposed to 30, only you'll retain the flexibility that comes with having a lower monthly payment.
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