When Is a Longer Mortgage Term Financially Beneficial?
Even though a 30-year mortgage is a gold standard product, you might consider a 15-year term if you’re able to swing a higher mortgage payment. You can build equity faster and pay off the house sooner.
But despite these (and other) benefits of a shorter mortgage term, a longer term can be the better choice financially.
A 15-year mortgage results in a higher monthly payment. And the more you pay toward your mortgage each month, the less money you’ll have available for other goals.
Here’s why it’s a good idea to choose a 30-year mortgage.
1. Use extra income to pay off student debt
It takes some people as many as 10 to 20 years to pay off their student loans. These long repayment terms can force home buyers with student loan debt to make hefty payments for most of their adult life while losing thousands of dollars in interest.
Rather than choose a 15-year mortgage, you may want to opt for a traditional 30-year mortgage if you have student loan debt. This will free up cash in your budget, and you can put the savings toward repaying your student loans.
2. Pay off credit cards
Rather than pour all your extra money into paying off your home loan earlier, use these funds to get rid of high-interest credit card debt first, or any other loans you might have.
Ideally, you should pay down credit cards before buying a house. This can lower your credit utilization ratio, resulting in a higher credit score and possibly a better mortgage interest rate.
If you’re purchasing a home and have credit card debt, keep your mortgage payment low with a 30-year term and focus on paying off your credit cards over the next few years. If you choose to refinance your mortgage later, you may qualify for a lower rate thanks to your responsible use of credit and lower credit card balances.
3. Save for retirement
Your income may only stretch so far. So, while a 15-year mortgage can pay off your home sooner and help you build equity faster, you shouldn’t pay off your home at the expense of saving for retirement.
Since a 30-year mortgage keeps your mortgage payment low, you’ll have more income to contribute to a 401(k) or an individual retirement account. The more you contribute, the more opportunity you’ll have for your money to grow over the next 20, 30 or 40 years
4. Build an emergency savings
Some people spend the majority of their income on housing and don’t plan for emergencies. Homeownership is a big financial responsibility, especially once you add in the cost of maintenance and improvements. You’ll eventually need to replace the roof, the water heater, appliances, the windows and make other repairs.
If a 15-year mortgage stretches your income too thin, opt for a longer term and use the savings to build up your emergency fund.
Additionally, even if you choose a 30-year term, there’s always the option to make extra principal payments to pay off your loan sooner. So, once you’ve paid off credit cards, student loans, or built a sizable emergency fund, you can then add extra funds to your mortgage payment to build equity and pay off the balance sooner.
We understand you have plenty of mortgage-related questions. Our experts at Cherry Creek Mortgage can address your concerns and help you decide whether a 30-year or 15-year mortgage is right for you. Give us a call today and buy with confidence.