It’s a deceptively simple question: do you want to own your home in 15 years or 30? We all know the pros and cons of each term — the shorter mortgage term has higher monthly payments, but you build equity more quickly and pay less over the life of the mortgage, whereas the 30 year term frees up money each month to be used elsewhere. But how do you know which is the right term for you? Here are some questions to ask yourself to help you determine which mortgage term to choose.
How much house do you need?
I suspect that fewer people make this mistake now than before the housing collapse, but it is important to remember how foolish it is to be house-poor. A “benefit” of the 30-year mortgage is the fact that it allows you to purchase a more expensive home that you could not necessarily afford with a shorter term. But it’s one thing to make a slight stretch to buy the right house and it’s quite another to reach far beyond your means.
It makes good sense to purchase a home you could afford even with the monthly payment of a 15-year mortgage. Then you will have the flexibility of deciding which is right for your budget, rather than having to take the 30-year option.
How long do you plan to spend in the house?
If you think you’ll stay in the house for 5 years or less, then you’ll need to weigh the consequences of spending more per month (and therefore having more equity available when you sell) to those of keeping your monthly housing payments low while you are anticipating some sort of move in the future. Will you need the equity more later or the extra money in your monthly budget now?
If you expect to stay in your home for the long haul, that also presents you with some choices. A 30-year mortgage gives you some financial leeway to either purchase a house you could grow into (i.e., a more expensive home) or spend money on renovations that will make a more modest house become yours. But paying off that mortgage in 15 years means that you will have a “windfall” of extra money each month while you are still several years from retirement.
How much financial flexibility do you need?
If you can swing the payment on a 15-year term, will that leave you with enough wiggle room at the end of each month? It can be easy to crunch the numbers and get dollar signs in your eyes when thinking about how much you will save in interest over that time. But don’t forget that you have to live on your monthly budget, and the difference between a 15- and a 30-year term might be the difference between a night at the steak house once a month and grabbing burgers at the local drive through.
For some homeowners, taking a 30-year mortgage and sending double payments each month is a happy medium that still allows for flexibility if life sends you a financial curve ball — or if you just miss the extras and instead send in one payment that month to pay for some of the luxuries.
Unfortunately, there is no easy answer to the 15 or 30-year mortgage question, as it all depends on your circumstances. However, making sure that you think through the consequences of either term will help you make the best money decision for your life and budget.