July 9th, 2018 6:36 AM by Jackie A. Graves, President
Times are tough
for the American homebuyer.
are the on rise, right along with mortgage rates,
and there simply aren’t that many houses on the market. The improving
economy means people are starting to feel wealthier, but with wages stagnant,
they’re taking on more debt to buy a home.
inventory so low, prospective buyers must be prepared to make a quick decision
on a property, which means you must have a firm understanding of what you think
you can afford to borrow.
question you need to ask is: Am I better off with a 15-year fixed-rate mortgage, or a traditional 30-year one?
Here are some pros and cons of 15-year fixed mortgages to help you make the
You save a lot on interest
today has a decision to make.
You can sit
on the sidelines long enough to build sufficient savings to afford a higher
monthly payment with a 15-year mortgage or jump more quickly into the rising
market by taking out a 30-year loan and enjoying a lower mortgage payment but
more borrowing costs overall.
can save a lot of money with a shorter loan.
Let’s say you
put down 10 percent on $264,800 home – the average price for existing home
sales, according to the National Association of Realtors – and borrow the rest
from a mortgage lender with a 4.55 percent interest rate.
You’ll end up
paying more than $175,000 over the course of the mortgage, or about $84,000
more than you would with a 15-year loan.
those savings, though, you’d have to pony up an extra $700 per month.
Bankrate’s mortgage calculator to estimate your
monthly payments and see how much house you can afford.
Forced to save
Americans struggle to save.
may not have the means to put money away, while others, especially those who
support children or older parents, may be suffocated by costs.
Or you might
simply lack the discipline to save. Enter the 15-year mortgage.
You have only
so much income, and if more is directed toward your house, then you’ll
participate in less frivolous spending.
yourself to save in a liquid financial asset, like a savings account, would
give you more flexibility should you find yourself in need of cash.
A less costly retirement
Nearly 4 in 5
households led by someone over the age of 65 own their home, and half have no
debt on it whatsoever, according to the
Bureau of Labor Statistics. That’s a big reason retirees spend about
$6,000 less than those between the ages of 45 and 54 on housing.
mortgage-free retirement erases a major ongoing payment while you’re living on
a fixed income and allows you to use your home as a source of income, through a
reverse mortgage, should you need the cash.
their 50s with solid savings and job security, and the desire to be
mortgage-free by 65, should consider a 15-year mortgage when moving or
Your savings may suffer
and large, are not good at saving. Here’s a sampling:
yourself to a large monthly payment to save money in the long run, you can put
yourself in a bind along the way.
a 15-year mortgage “are nearly 50 percent higher than that of a 30-year
loan, which can strain the household budget and leave little in the way of
wiggle room,” says Greg McBride, CFA, Bankrate chief financial analyst.
you’re getting something for your money: more of your own house. But tying cash
in a single asset carries significant risk.
pace at which equity is built is of little consolation in the event of
financial difficulty as the additional home equity is inaccessible,” McBride
says. “Money in the bank, or other liquid financial assets, will pay the bills
– home equity will not.”
Fewer tax perks
The new GOP
tax bill will result in fewer tax filers itemizing their deductions, thanks in
large part to a higher standard deduction. (The mortgage
interest deduction was made less generous, too.)
The Tax Policy Center estimates that just
1 in 10 households will now itemize, down from 30 percent last year.
especially true for those with a 15-year mortgage, by definition. Less interest
paid means less interest to deduct.
chances are you are going to take the standard deduction anyway.
is a 15-year mortgage right for you?
feel counterintuitive. Who wants to give more to the bank?
mortgage isn’t like credit card debt. Interest rates, despite rising
recently, are historically low, meaning your borrowing pain is
dramatically reduced. Why not take advantage of this low fixed-rate loan,
especially if you can deduct your mortgage interest payments, and use the
leftover cash to secure your finances?
your six months’
worth of emergency savings, ramp up your savings in your child’s college
account and contribute 15 percent of your pay into a
tax-preferred retirement account. Pay down any bad debt, like a
hefty credit card balance.
A house is
more than an asset to most people – it’s your home. It’s where your family
grows up, your memories are created, and stories are shaped. You will likely
feel a deeper connection to it than, say, your bank account.
doesn’t mean you should own it quicker than you can afford.
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