15-year vs 30-year Mortgage vs The Compromise

15-year Mortgage

The benefit of a 15-year mortgage is that you can secure a lower interest rate and pay off your mortgage 15 years earlier than a 30-year mortgage. As a result, you will pay significantly less interest with a 15-year mortgage.  However, the downside is that your monthly payment will be significantly higher than a 30-year loan which will decrease your available monthly capital for other expenses.  In addition, the higher monthly payment will increase your debt to income ratio.  Increasing your debt to income ratio can make it more difficult to qualify for additional loans when purchasing investment properties.

30-year Mortgage

A 30-year mortgage will have a higher interest rate than a 15-year mortgage but the benefit is a lower monthly payment.  The lower monthly payment will free up capital for other investments and improve your ability to qualify for additional loans.  The downside is that you will pay more interest with a 30-year loan and will also carry this loan for an additional 15 years. 

The factors to weigh between these two options are TIME and MONEY and they are interchangeable.  TIME is MONEY.  If you see your home as your biggest expense and your goal is to retire by 50 then having a 15-year loan may work for you.  You save MONEY by paying less interest and you save TIME by paying your mortgage for 15 less years.  If you choose this option you need to make sure you can afford the payment.  Dave Ramsey would suggest that your payment should be less than 25% of your net monthly income.

You can also analyze the 30-year mortgage via TIME is MONEY.  In this view, the 30-year mortgage allows you to use TIME to your advantage by investing your MONEY now in other investments, allowing them to grow over TIME.  If the MONEY you save monthly with the 30-year mortgage can be invested in real estate or other avenues that will return a profit greater than the amount you would save on interest payments than this option may work for you….

The Compromise

Take out a 30-year mortgage and make additional payments to the principle via biweekly payments (if your bank allows), additional payments at the end of the month or an additional payment at the end of the year.  An easy way to do this is to divide your mortgage payment by 12 and add that to your monthly mortgage payment.  You can adjust your additional payments to decrease your mortgage to 22 years… saving TIME and MONEY.  This is a great option for many because it frees up capital for other investments, decreases your debt to income ratio when applying for additional loans and you still have the option to pay down the mortgage earlier if you have the available income.

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