With Holden Lewis, Senior Mortgage Analyst and Senior Editor at bankrate.com
The conventional wisdom regarding home mortgages is that the 15-year is better than the 30-year plan in the long run. After 15 years, you’ll own your home free and clear, a basic tenet of the American dream, and you’ve paid fewer fees and a lower interest rate.
Holden Lewis, Senior Editor at bankrate.com and a senior mortgage analyst, recently wrote an article focused on the drawbacks of taking out a 15-year mortgage, why people typically opt for them as opposed to a 30-year mortgage, and why they often refinance at some point into that 15-year period.
On the surface, it appears that the main drawback of the 15-year mortgage is a higher monthly payment. Holden says that part of the appeal is the emotional satisfaction that comes with knowing you can have your home paid off in a shorter period of time and, that when that day comes, no matter what happens, your safety net, your security zone, is that home.
But a deeper analysis reveals that having a 30-year mortgage actually gives you more flexibility and security in hard times. As Holden explains it, “Let's say the car needs a big repair and someone is hospitalized. All of a sudden, you’ve got all these huge bills. If you have a 30-year loan with that smaller monthly payment than a 15-year loan, then you just have more room to pay all of your bills, including your mortgage.” You’d be better prepared for any of life’s unexpected events.
He advises taking out a 30-year loan and paying extra on that mortgage each month as long as you can. Assuming there is no financial crisis along the way, you have the potential to have the same benefits of a 15-year loan with less interest paid and full home ownership in less time.
With a 30-year loan, you also have the option to refinance into either a 15-year loan or into another 30-year loan with a lower interest rate. “If you refinance into another 30-year loan under the scenario I have,” says Holden, “if you pay an extra $530.00 a month on this $200,000.00 mortgage, you'll end up paying it off in 15 years, but if you get a 15-year loan, it's $73.00 less than that $530.00 extra.” You get a break on the interest rate with a 15-year and, again assuming a $200,000 loan amount, you would be ahead $73 a month, an amount you can use for savings.
Paying less on that monthly mortgage offers the possibility to set aside an amount to invest in, perhaps, a basket of common stocks such as the S&P 500, which over a 10 or 20-year period, statistics show would have a higher rate of return than investing in your home.
In addition, cautions Holden, “…it would be utter madness to be paying off your mortgage in 15 years when you're carrying a balance on a credit card that has an interest rate of 12% or 18%.” So before you go for a mortgage, know all the facts and determine what’s in your best interest.