Mortgage packages that are available these days are diverse and formulated to facilitate all kinds of circumstances. A person can easily feel overwhelmed because of the number of options available.
Choosing between a 15-year versus a 30-year mortgage plan is one such situation. Although the structure of both mortgage strategies are the same, there are some considerations to keep in mind before selecting a mortgage plan.
The Effect of Time
With mortgages, time has a great impact on the final cost. A mortgage is merely a term loan secured by real estate. The debtor pays the interest which is calculated on an annual basis on the outstanding amount still to be paid. The interest rate along with the monthly payback amount remains fixed whereas the interest and principal deductions vary in each monthly installment. That is, the interest deducted in the beginning constitutes the major portion of monthly installments, but it declines gradually over the years with an increase in the deduction of the principal amount.
For a 30-year period, the payable balance reduces in a slow manner as compared to that of a 15-year period. This means that the principal balance declines at a faster pace in the 15-year period.
Fluctuating Interest Rates
The financial institutions offering mortgages have to spend comparatively more in the formulation of long-term loans. Moreover, there are additional payments associated with the long-term loans which render it even more expensive. This is the reason the short-term 15-year mortgage typically offers a lower interest rate to the borrowers as compared to the interest rate in the case of a 30-year period.
The interest rate might not seem to create much difference, but variations of just a few points can result in the savings of thousands of dollars. Mortgage calculators can provide an accurate assistance in this regard.
The selection of a mortgage plan is also dependent upon the savings an individual might want to retain. With a 15-year mortgage, it might not be possible for a person to save a significant amount of money considering a higher monthly installment. However, it can be comparatively easier to have some savings with a 30-year mortgage because of lower monthly installments. Keeping a reserved savings can be an important determinant as far as the selection of a mortgage plan is concerned.
A concern with a 15-year loan may be that the payment could be too high if an unexpected financial situation was to occur. There is another option to consider. A possible solution may be to select a 30-year term, but pay extra every month instead of spending that spare amount somewhere else. This can be good practice. Although the interest rate will be paid in accordance with the 30-year term, it would still be better to pay the term off earlier than to keep paying over a period of 30 years. With this strategy and a disciplined approach, the debt can be paid in full without getting concerned about unforeseen circumstances.
Tax Breaks Issue
Tax breaks should not be a significant factor when selecting a mortgage. Although people with a 30-year mortgage pay less tax, the interest rate is still higher than that of a 15-year mortgage. Despite a lower tax payment, it is not beneficial in the long run. Keep in mind that the 15-year debtors are initially facing the difficulty of a higher tax payment, but they are the ones that will enjoy the perks of a short term mortgage.