Is It Always Better To Choose A Shorter Term Mortgage?
Here are a few questions I always ask people when talking about debt and refinancing: what other debt do you have; how long are you going to own this home; are you on track for your financial goals; and what tax bracket are you in.
What Other Debt Do You Have?
This is usually the starting question because other things may not matter if you have a lot of other debt at a high interest rate. If you do have other debts that have a high interest rate, i.e. credit card, car loan…, it usually makes sense to go with the 30-year mortgage. This way you can use the money you’d free up each month to pay down your other debts. But that is the key, you need to use the freed up money to pay down the other debt, not spend it.
How Long Are You Going To Own This Home?
If you really don’t plan on living in this home long, you should lean towards the 15-year term. The amortization of a 15-year loan is much faster than a 30-year loan and therefore every payment on the 15-year mortgage is a higher percentage of the principal that it would be on the same 30-year term. The key here is to make sure that when you want to move, you have other cash savings to pay for those expenses and make the down payment on your next home. I’ve met too many people who thought home values would never decline and they could just keep “moving up” without having to have much cash to put down. These past few years have taught people to save separately for your next home and not rely on your home value always going up.
Are You On Track For Your Financial Goals?
How does your retirement picture look? How about college savings? If you don’t know, contact me. If you do, and you’ve used reasonable assumptions (6-7% pre-tax investment gains, 3+% inflation…) do you need to be saving more? If you’re not on track you should lean towards using the 30-year term. Once again, like the debt question, SAVE THE EXTRA! Make this automatic and it will happen. Set up an automatic transfer to a retirement or education account or increase your current retirement plan savings.
What Tax Bracket Are You In?
Are you in a high tax bracket? Do you pay AMT every year? It may make sense to go with the 30-year term because your after-tax cost of the loan may be less than what you can earn by safely investing. Also, by using the 30-year over the 15-year you get the tax benefit for longer.
Can you see an overall theme here? Use the 30-year if you could use the funds for something better and 15-year if you don’t need the funds for anything else.
I hope this was helpful.
If you have any questions you’d like me to answer, please feel free to get in contact with me or to send me an e-mail,