Choosing between a 15-year mortgage and a 30-year mortgage can be a difficult decision, one which will have a major financial impact on your life. On the one hand, the 30-year mortgage will have lower monthly payments, but you will pay a higher rate of interest. On the other hand, a 15-year mortgage requires higher monthly payments (at a lower interest rate), but your Jersey Shore real estate will be paid off in half the time.
In order to decide which of the two is better for you, you need to carefully analyze your life situation in the following areas:
1. Current Financial Situation
Can you presently afford to pay the higher monthly payment of a 15-year loan on your Jersey Shore real estate? In addition to income, factor in other expenses such as credit card debt, car payments, food, clothing, and entertainment. As a guiding principle, your total housing expense should not exceed 40% of your gross monthly income minus taxes. Beware of becoming house poor and having few liquid assets. It is essential that you have a hefty nest egg to rely on I n case you lose your job or are unable to work.
2. Spending Habits
If you choose a 30-year mortgage, what will you do with the money you save each month?
Will you save/invest it? Put it in a retirement or college fund? Can you live on a budget, avoid credit card debt, and save regularly? If so, then the 30-year loan may work well for you. If, however, you can afford the higher payment and will most likely “fritter away” any extra money, you just may be better off borrowing for 15 years.
3. Tax Ramifications
You should certainly check with your accountant regarding the tax benefits and /or disadvantages of each type of mortgage. Because mortgage interest is a major income tax deduction, many people want to keep paying the mortgage on their Jersey Shore real estate for as long as they can.
4. Future Expenses
Will you need extra money for college costs or retirement planning? What about emergency repairs on your Jersey Shore real estate or nursing home fees? The 15-year mortgage lacks the flexibility of the 30-year one in providing money to deal with these needs. If you have saved or invested the money saved with the 30-year mortgage, you will have liquid assets available to meet these expenses. You can, of course, obtain a home equity loan on your 15- year mortgage, but you will pay a rate of interest higher than that on the original loan.
5. Your Ultimate Goals
If your major financial purpose is to build equity quickly and pay off the mortgage in a shorter time, the 15-year loan may be for you. If, however, you’d like to make mortgage payments for a shortened time period but have serious reservations about contractually obligating yourself to an inflexible higher amount, you might consider making extra payments on your 20-year mortgage, whatever and whenever you can. Another option is to convert your 30-year loan to a 15-yeae one at a time when your financial situation is stable and you have accumulated assets adequate to sustain you in an emergency.
Deciding which mortgage is better for you will require an understanding of the advantages and disadvantages of each and a thorough analysis of your current and future financial situation, your lifestyle, and your goals.