Sandy DavisSenior Loan Officer NMLS#: 172843
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There’s plenty of advice circulating online on why a 15-year mortgage is a better choice compared to a 30-year fixed mortgage. However, the benefits of a 15-year mortgage only apply to a select group of people and the higher monthly payments may have you looking at other options.
Unless you have a great deal of disposable income, a 15-year mortgage can do more harm than good. It’s important to look at the entire financial picture when deciding how high of a monthly payment you can afford. The higher monthly payments associated with a 15-year mortgage could cause your investments, insurance coverage, and future college costs for your children to suffer.
And while 15-year mortgages certainly have their advantages, keep in mind that less than 10 percent of homeowners have 15-year mortgages, mainly due to the higher payment amounts. A 15-year mortgage is simply not right for everybody. Here are some of the biggest reasons to avoid a 15-year mortgage and opt for a 30-year loan instead:
30-Year Mortgages Offer Greater Flexibility
For many homeowners, coming up with a down payment can be hard enough, so spreading out those mortgage payments can make your home a lot more affordable. Especially if you’re buying your first home, cutting the time of your mortgage in half is not a likely possibility at first.
When weighing your options, consider this equation:
Your assets - Your Liabilities = Your Net Worth
Many people fall into the bad habit of solely focusing on paying off their mortgage while neglecting other debts on their balance sheet, such as student loans, credit card debt and car loans. The higher monthly payments associated with a 15-year loan could prevent you from paying off other debts effectively.
One of the biggest temptations of a 15-year mortgage is the hope of not having a mortgage when you retire. However, you’ll likely have to refinance and take Cash Out to pay for your children’s college education and the other expenses that your savings didn’t quite cover.
However, when your financial situation allows for it, you can always put extra money towards your balance and pay off your loan faster. But one of the greatest advantages of a 30-year loan is that when money is tight, you can take advantage of the lower monthly payments and use the money you’re saving to go towards your other bills.
The higher monthly payments associated with 15-year mortgages often mean that you’ll qualify for a less expensive loan. As a result, you may have to settle for a smaller home or forgo your dream neighborhood. Opting to stretch that loan over a 30-year period can allow you to keep your payments low and have more options available to you.
All of the above reasons were major influencers in why lenders wrote “nearly 22 times as many 30-year home purchase mortgages as they did those with 15-year terms” in 2018, according to NerdWallet analysis of Home Mortgage Disclosure Act data.
Confidence and Affordability
It’s important to recognize that there are a lot of factors that can affect your ability to consistently pay your mortgage each month. Borrowers need consistent confidence in their career paths or have enough money set aside in savings to cover the higher mortgage if they face a job loss or salary drop. After facing the unprecedented circumstances brought to us during the COVID-19 pandemic, many Americans understand the importance of financial flexibility when you need it.
Many Americans have faced inconsistencies in their financial plans. According to a MacArthur Foundation report, between 2011 and 2014, 52% of Americans had to make at least one major sacrifice to cover their housing payments. This includes everything from cutting back on healthcare, postponing retirement savings, or taking on credit card debt as a result.
The opportunity cost of having a lower payment on a mortgage means you could have more to invest. This gives you the possibility to earn a higher return on your investments over the loan interest rate you are paying on a mortgage. A longer mortgage may also help you build equity quicker by not having a large amount of liquid cash reserves in the bank.
Proper financial planning may lead you towards a longer term mortgage so you can effectively pay off your other debts and put money towards other important things such as life insurance.
Options for Change
Later in life, you may be earning more money or find that you’re planning on staying in your current home for years to come. At this point, you may consider refinancing into a 15-year mortgage.
However, it’s important to ensure that you have enough income to afford it. You should be able to comfortably manage your household debts and have savings for emergencies before looking to decrease your loan length.