Real Estate News with Terri Taydus, GRI, CNA

What's The Deal With 15 Year Mortgage Loans? Is This an Option for Me?

December 11th, 2011 8:20 PM by Taydus Taydus

With interest rates remaining at record lows, many people are starting to look twice at their current home mortgages. They are asking questions like “Is now a good time to refinance?” and “What kind of home loan should I consider?”

There is a lot of information out there, on the Internet, T.V., and even from well meaning friends and family members. With so much information at our finger tips it is difficult to decide what is right for you.

The best advice I can give is to speak to a reputable mortgage lender – preferably someone that is familiar with your financial situation. It is always best to avoid situations where you do not know exactly “who” is answering your financial questions (i.e. a clerk could be answering the inquiry you sent to brand “x” via the Internet.)

One question that I hear over and over again is the dilemma whether to take out a 15 year fixed rate mortgage or a 30 year fixed rate mortgage (keep in mind that there are many other options in between – a knowledgeable mortgage lender can explain the different options that are available to you.) Depending on whom you speak with, you will get any number of answers to this 15 or 30 question that perplexes so many home owners / buyers.

Before you decide, ask yourself why would you do a 15 year mortgage? The rate may be a fraction of a percent lower, but is it really worth the gamble? Your monthly payment will be higher, and even IF the higher mortgage payment is not a problem for you now can you say with certainty that it will not be a problem for the next 15 years? The other argument is that you will “build equity and pay down your mortgage faster” with a 15 year mortgage. Yes this is true, BUT you are now committed to that higher monthly mortgage payment. You know the saying “S*#% Happens?” ….well, it does! What if during that 15 year period, you acquire unexpected medical bills? What if you need to financially support an aging parent or loved one? What if an unforeseen financial strain comes up with one of your kids or a spouse? If you are committed to that higher mortgage payment because you are locked into a 15 year mortgage what are you going to do if you need that extra money? You could refinance. You could take out an equity line (assuming you qualify for the loan). But doesn’t this defeat the purpose of the 15 year mortgage in the first place?

Here is another plan, why not take out the 30 year fixed rate mortgage and pre-pay it? Ask your lender for an Amortization Schedule of your loan. This will show you how much “extra” you need to pay each month to turn your 30 year loan into a 15 year loan. This way you can pay the extra (just like you would if you had a 15 year loan), at a slightly higher interest rate, BUT you have the piece of mind knowing that IF for some reason you needed the extra cash every month you could simply pay the required (lower) monthly mortgage amount and use the “extra” you were paying to apply toward an emergency etc. This way, you keep the low rate that your loan was locked into (i.e. you wouldn’t need to refinance or risk foreclosing on your home) and you can resume paying extra against your mortgage as soon as you get back on your feet.

I am a Realtor not a mortgage lender or financial advisor. My advice to you if you are considering a 15 year fixed rate mortgage loan would be to speak to your lender and see what they have to say. If they encourage you to move forward with the 15 year loan, ask them about the option above. Educating yourself so you can make an informed decision is the best thing you can do to protect yourself, your family and your financial future. Keep in mind that there are situations where a 15 year mortgage may be in your best interest. But only you and your mortgage lender can answer that question.

Posted by Taydus Taydus on December 11th, 2011 8:20 PM

Typically the rtae on the 15 year fixed mortgage is .25 - .5 lower than the 30 year mortgage. Recently the spread ha sbeen slightly greater and today is .625 with the 15 year at 3.5 with no points and the 30 year at 4.125%. Even with the .625 spread you only have 11 additional payments 15 years from now if you simply prepay the 30 year based on the 15 year payment. When you take into account that those 11 payments are interest and tax deductible and what the cost of money will be 15 years from now it is hardly worth the risk to commit to a 30% higher payment for 15 years. The risk far outweighs the benefit unless you have significant cash resources available in the event of an emergency.
Posted by Joe Taydus on December 12th, 2011 4:51 PM


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