October 5th, 2021 11:39 AM by Jackie A. Graves
When you borrow to buy a home, you'll need to decide on the loan repayment timeline. You will have a choice, with most lenders offering loans between 15 and 30 years in duration.
Loans with a longer loan repayment timeline typically have higher interest rates and cost more over time – but there are still reasons why you may want to opt for the longer payoff period.
Here are four of them.
1. You'll have lower monthly payments
The longer your loan payoff time, the lower your monthly payment. That's because you will be making more of those payments over time so each one can be lower, and you'll still pay down your principal and interest on schedule.
Of course, the flip side of this is that the longer you stretch out your payment period, the more time you'll have to spend making payments instead of doing other things with your money. And by paying interest for longer, you'll end up with higher total costs.
It's helpful to find a balance. For many people, the 30-year mortgage offers a reasonable monthly payment without stretching out payments so long that you're essentially never mortgage free. The 15-year, on the other hand, comes with monthly payments that can be pretty high, making it difficult to qualify for a loan or fit them into your budget.
2. You'll have more flexibility with what to do with your money
When you avoid committing to a mortgage with a short payoff time and a high monthly payment, you won't tie up a ton of your money each month for housing costs. You can use the money you save by choosing a 30-year loan instead of a 15-year loan to do other things such as saving for emergencies or for retirement.
3. You can take advantage of the interest deduction for longer
If you itemize on your taxes, you have the option to deduct mortgage interest on home loans of up to $750,000. If you repay your mortgage in just 15-years, you'll lose that deduction in half the time compared with if you have a 30-year loan.
The mortgage interest deduction subsidizes the cost of homeownership. Your take-home income doesn't go down by as much when you pay mortgage interest since you are paying your interest with pre-tax dollars and thus lowering your tax bill.
The savings from the interest deduction can be considerable, depending on your tax bracket.
4. You still have the option to pay the loan off early
One big benefit of a loan with a shorter repayment term is that you become debt-free sooner. But if you choose a 30-year loan instead of a 15-year loan, there's nothing to prevent you from making extra payments if you want to repay your loan ahead of schedule.
You have the option to do this any time that you want to and can afford to do so. You just aren't faced with the requirement to do so, which can add financial pressure.
For all of these reasons, a 30-year mortgage may be a better bet than a 15-year loan. You'll need to consider the size of your mortgage payment as well as your individual financial goals, though, when deciding what loan repayment timeline is best for you.
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