Owning a home is a goal for many people. It is the American Dream and can be a great asset in building wealth and becoming financially secure. A majority of home buyers need to take out a mortgage to purchase a home. There are many choices and terms for financing when it comes to buying a home. One of the choices is deciding on what time period to have a mortgage payment.
The period of time chosen for a home loan is often either a 15-year or 30-year mortgage. Both of these have their benefits. A large majority of financial sites you will read are proponents of a 15-year mortgage. This can be advantageous, but I am a big supporter of a 30-year year mortgage payment. There are a number of reasons it is many times a better choice in the world we live in today.
Why is a 30-Year Mortgage Better?
To me purchasing a home is a much better choice compared to renting. There are arguments for this with the costs of home ownership. From air conditioners to roofs needing to be replaced every so many years, there is a cost. I would almost even go as far as saying depending on the home, area, and money put into it during a period of time may result in not coming out very far ahead. It is even possible that a home’s value can depreciate.
Even with the costs involved in a home, there will typically be some money that can be taken away at the time of selling it in most cases. With renting there is no financial benefit when you leave. It may seem as though there are benefits when living in a rental with everything being taken care of, but you are paying for this.
Not everyone can afford to buy a home, but most should make it a goal. A 30-year mortgage makes it more attainable.
Flexibility and Cash Flow
A 15-year mortgage will almost always have a better interest rate. There is no denying this. But with a 30-year mortgage loan with no prepayment penalty, there is nothing stopping a person from paying off their home early. The 30-year term allows more flexibility for life events.
Why Would You Want the Flexibility of a 30-Year Mortgage?
The interest rate for a 30-year fixed mortgage will be higher than 15 years. However, one thing that will not be fixed is life. There is no way to tell what the future holds. Most of the time a 30-year mortgage payment will be lower compared to a 15-year. To some people, the difference may not be much. But to other people, it may be a significant amount that may make a difference if something were to happen.
Job loss, rising healthcare costs, and the unknown are reason enough to have the flexibility of a 30-year mortgage. What if your mortgage payment was, for example, $2000 per month on a 15-year term and it was $1500 a month on a 30 year? Would $500 a month make a difference if a job loss occurred? Wouldn’t the extra $500 go a little further rather than possibly depleting an entire emergency fund even if there is one?
I would encourage anyone that is purchasing a home to have a good emergency fund established. The typical period conveyed is usually three to six months. Yet, the truth is that depending on the education, job experience, and age of a person, three to six months may not be enough even in a good economy. For people that are older, it can often take much longer to find comparable employment following a job loss.
The lower monthly mortgage payment on a 30-year loan can make the difference during a difficult time. Not only can filler jobs sometimes make ends meet, but it can also save a person from losing their home with a lower mortgage payment. Once a 15-year mortgage is established with a higher payment, it will be challenging and not likely to refinance to a lower one with a job loss.
Better Returns May Be Possible on Another Investment
A number of financial experts argue that there are better returns on investment than owning a home. This does have some merits. This is especially true with relatively low mortgage rates. With rates around 4.5% at this time, it would not be too difficult to beat this over a 30-year period with the market’s history. The average annual return for the S&P 500 has been around 10% for the last 90 years.
Another factor to consider is diminishing home value. This can happen. What if you purchased a home in a nice area today and ten years later the neighborhood was less than desirable? What if home prices sink as they have in the past? If this were to happen, your money would be tied up resulting in a loss at sale time.
A 30-Year Mortgage May Afford a Better Home
Depending on your mode of thinking, this may not be what you imagine. This is not an endorsement to purchase the most lavish home possible. The fact is you should always buy the best option and below what you may be able to afford at that time. Just because a person qualifies for a million-dollar home doesn’t mean they should purchase one. I always suggest buying less than one can afford.
A 30-Year mortgage may offer someone the possibility of purchasing a home that is the correct size for their family. If you have six children, buying a two-bedroom one bath home may not be the best choice. Also, a 30-year term may make a difference in purchasing a home in a better area. It may offer the convenience of a close school and a neighborhood better suited for children and their safety.
When Does a 15-Year Mortgage Make Sense?
A 15-year mortgage payment is what a lot of financial specialists promote. My opinion is there only are a few circumstances where it makes the most sense.
People That Have a Hard Time Managing Money
If a person has a difficult time not spending money and saving, a 15-year home mortgage may be a good candidate. I am a believer that people can change with the right mindset, knowledge, and practice. But maybe not all people can change very quickly. The approach to have with a longer mortgage is to try and pay it off early. A person that does not have the discipline to try and obtain this goal should probably not take a 30-year mortgage if they have the means to pay it off in 15 years.
The right person for a 15-year mortgage would not only be a person that is bad at saving and managing money but one that has a stable income and a good emergency fund. Even a person that is bad at managing money, can have a life event happen that would derail them from the 15-year mortgage payment.
This type of person seems to be strange, doesn’t it? The type with money, bad at saving, and has an emergency fund established? If they are bad at saving how can they have money saved? Also, if a person is not good at managing money how could they have the means to pay on a 15-year mortgage loan? It does seem odd at least to me, but strange situations do occur.
Builds Equity Fast
For people that have a hard time with money, a 15-year mortgage payment builds equity fast. This can be a good benefit for someone that has a hard time saving granted the home purchased appreciates. If the value remains the same or goes up, a shorter mortgage can be a sound decision for someone to at least put some money away.
So, What is the Answer to a 15-Year Mortgage Compared to 30-Years?
Although generally it is said a 15-year mortgage is better by a number of financial professionals, it isn’t always the best choice as many of them would argue. It is not the only best decision as many of them would tell you. Not everyone comes from the same background, has the same lifestyle or even the same income. How can a 15-year mortgage always be the better selection? The answer is it can’t. It is important not only to be realistic when it comes to purchasing a home but also to make the smartest decision possible.
Yes, there is a need to have 15-year payments on a home. However, life does happen and it is unpredictable. Having the cash flow to be there for challenging times can make a difference. This may be through having a lower monthly payment in general or earning more money by investing the difference in having a 30-year term.
For me, there is peace of mind for owning a home and paying it off. The interest rate on a 30-year mortgage may be slightly higher than 15 years. But the extra interest is insurance. We all buy insurance on things. There is life insurance, car insurance and home insurance. A slightly higher interest rate for a lower monthly home payment insures that it may be more affordable to stay living in my home. It is just added homeowner insurance.
With my mortgage, there is no penalty for paying it off early. If there is extra money this can be put toward the payment each month, but if the amount needs to be lower at some point it already is.
There is nothing wrong with a 30-year mortgage payment. Just take the initiative to make extra payments when it makes sense.