This is an oft debated subject, usually among the well-to-do. While there is no right or wrong answer, much depends on the market and the spread (interest rate difference) between a 15 and a 30 yr mortgage. Below we offer a comparison of interest rates, payments, and then provide some good old homespun advice and guidance.
Interest Rates:
As of 1/1/2010:
The average 30 yr fixed loan is: 5.33%
The average 15 yr mortgage is: 4.67%
Advantage: 15 yr Mortgage
The difference between a 30 yr fixed and a 15 yr fixed can and will fluctuate depending on market conditions. At times, there is little to no difference between a 30 and a 15 yr fixed. Other times, there can be a 1% or more difference. Obviously, before you jump at the 15 yr fixed, take a look at the spread.
Payments:
Because the 15 yr Loan is paid off in half the time, naturally it's going to come with a higher payment. Comparing the 2 mortgages using our 0k Loan Balance and our current average interest rates, we get the following:
30 yr fixed Payment @ 5.33%: 14
15 yr fixed Payment @ 4.67%: 47
Expectedly, the 30 yr payment is less, despite having the higher interest rate. That being said, the 15 yr payment is paid off in half the time, without being double the 30 yr payment.
Advantage: 30 yr fixed
Bankapedia's Take:
So while the above offers an overly simplified view of the differences, the decision ultimately comes down to 3 things:
Monthly Income: Can you qualify or afford to make the 15 yr payment? In the last few decades, people have had a tendency to max out what they can afford on a home. Thus, the prevalence of Adjustable Rate Mortgages and Option ARM's over the past several yrs. While the idea of a 15 yr mortgage may be appealing in that you will have your mortgage paid off before you retire, most people wouldn't qualify because they would fail to meet the DTI http://www.bankapedia.com [http://www.bankapedia.com/mortgage-encyclopedia/faqs/residential-mortgage-terms/659-debt-to-income-ratio] requirements.
Spending Habits: While we'd like to think of ourselves as Financially Disciplined, the reality of life can often interfere with our best-laid plans to set ourselves up for a smooth retirement. So, in an effort not to get all Suzie Orman on everyone, let's factor in enjoyment. Let's say a young couple chooses a 15 yr mortgage over a 30 yr. With the above example, the difference per month is roughly 0 a month. Not insignificant. Let's take a look at what that can buy. It's roughly the difference between leasing a Porsche Boxter and Honda Civic (the Honda obviously representing the lower payment). You might not have to tell your significant other "no we don't have the extra money" when they want that KitchenAid Stand Mixer. It's a very nice vacation once or twice a yr. We aren't robots and sometimes having that cushion or that additional utility to go out and recharge the batteries factors into our work, which in turn factors into our income.
Investment Habits: A simple rule of thumb when deciding whether to save or pay off debt is what your investment return is vs. what the interest rate on your debt is. Credit Cards carrying interest rates of 20% plus are usually a safe bet to pay off vs. investing, simply because getting a 20% return consistently is extremely rare. However, in our above example of 5.33%, (the 30 yr provides the extra money so we use its interest rate) getting that kind of return is not impossible. While CD rates are at an all time low--below 2%. The DOW JONES climbed an incredible 53% for the yr. So, a relatively safe mutual fund should be able to exceed the 5.33% interest rate. Additionally, if you are investing your money, it is liquid as opposed to having to refinance or get a HELOC to get your money out of your home.
So in summation, if you are a play it safe, are an extremely disciplined person, then get the 15 yr. For the rest of us, the savings simply isn't enough to justify the decrease in investment or spending money. If the spread were 4 or 5% points, it would be much easier to be in the 15 yrs camp, but at current rates the juice isn't worth the squeeze.
For More Articles, Definitions, or to Chat Live with a Mortgage Professional visit: www.bankapedia.com [http://www.bankapedia.com/]
