If you are shopping for your first home, you may be thinking about the financing terms for a 30-year mortgage. How large of a down payment will you make and what type of interest will you be able to get? You may not have thought about a 15-year mortgage. This is normal. After all, for most people, 30-year financing is synonymous with a mortgage. But there are a few significant advantages to a 15-year mortgage. The following are among the most important things to consider about mortgages.
1. The interest rates are lower
To a mortgage lender, a 15-year mortgage is less risky, so the interest rates will reflect this. Although your payments are higher with a 15-year mortgage, some of this is mitigated by lower interest rates. More importantly, you are paying less for your mortgage over its entire length than you are with a 30-year mortgage and this is smart for your long-term personal finances.
2. You build up equity more quickly
With a 30-year mortgage, in the early years, a large portion of your payments will be going towards interest. The only equity you are likely to realize will be an increase in the value of your home due to an upturn in the market. With a 15-year mortgage, the percentage of your mortgage payment that is used to pay down the principle is much larger, so you will begin building equity quickly. If there is a downturn in the economy, those with a 15-year mortgage are less likely to owe more on a mortgage than the house is worth.
3. There is a savings component
A 15-year mortgage combines the long-term investment of real estate with a forced savings. Since you are paying down a mortgage in half the time, you are building equity that much faster, and this can loosely be compared to having 30-years' worth of mortgage payments and setting aside money for savings. A 15-year mortgage is a way of forcing yourself to save each month, but you are putting your savings into your house.
4. You will own your home in half the time
Although this is obvious, it needs to be said. After 15 years, your mortgage will be paid off, and you will have the deed to your home. Chances are, you will still be many years away from retirement, but your cost for housing will now be very low. Your main expense will likely be property tax followed by homeowners insurance.
Although the payments are higher with a 15-year mortgage than a 30-year mortgage, the advantages listed above should be given a lot of consideration. It may even be worth thinking about buying a home with a lower selling price to make a 15-year mortgage fit your budget. You can also save up and make a larger down payment.
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