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  • Writer's pictureMMH CPA

How to Choose a 15-year or 30-year Mortgage

You’re in the market for a house. Let’s assume you find a great place that’s selling for $240,000 and meets all your criteria. With a 20 percent down payment ($48,000) and estimated closing costs of $3,000, you’ll need to cover the balance of $189,000 with a mortgage.

After talking with your banker, you learn that you qualify for a 30-year mortgage with an annual interest rate of 4.8 percent. You also qualify for a 15-year mortgage with a lower interest rate of 4.4 percent. Both mortgages are fixed, meaning the interest rate won’t change over the payback period.

Assuming that you plan to make monthly payments for the entire term of either loan, should you opt for the longer or shorter mortgage?

These three primary factors are worth considering:

Monthly payment. In this example, you’ll pay about $991 each month for principal and interest (excluding taxes and insurance) on a 30-year mortgage. Monthly payments for the 15-year mortgage will be about $1,436 (nearly 45 percent higher). Will your budget — both now and in the future — accommodate the higher payment required by a 15-year mortgage?

Total interest. Here’s where the 15-year mortgage shines. Because you make interest payments for half as many years, you’ll save over $98,000 (58 percent) in total interest over the course of the loan. This route may be ideal for people who know they won’t need to rely on the financial wiggle room smaller payments typically provide.

Flexibility. Under both scenarios, you sign a contract. You’re required to make monthly payments regardless of job losses, medical emergencies or other unforeseen circumstances. Should life throw you a curve-ball, the lower monthly payment of a 30-year mortgage may enable you to stay within budget and prevent foreclosure.

You may also consider making extra principal payments on a 30-year mortgage. You’ll pay off the balance sooner and retain a measure of flexibility in your monthly expenses.

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