15-year mortgage

For decades, when home buyers were discussing the terms of their mortgage, it was generally understood that it would be paid off in 30 years. But a couple of decades ago, buyers started hearing about the option of a 15-year mortgage.   The allure of the shorter term mortgage is obvious: Shorter terms means you pay less interest.

It isn’t the deal it once was

Using the mortgage calculator at Realtor.com, we can see just how much your payment will be. With a buying price of $200,000 and a 20% ($40,000) down payment, your payment will be $1,086 on a 15-year mortgage at 2.75% APR. On a 30-year mortgage for the same house, same down payment, with 3.5% APR, your payment will be $718. That’s a difference of $368.

The drop in interest rates isn’t what it used to be. In the 1980s, there was a discernible difference in interest rates. The monthly payment on a 15-year mortgage at 8.5% would be $1575, while the same house at 10.5% for a 30-year note would be $1,463. That’s a difference of $108.

Strain on the budget

Many home buyers find that coming up with the extra money month in and month out is prohibitive. Any change to your financial situation could make it more difficult. Having children, buying a new car, a bout of unemployment… anything could put a strain on your already tight budget.

Less flexibility

Paying over 50% more on your mortgage requires fiscal discipline, to be sure. It also means the difference between investing in retirement, taking vacations and spending less money on almost everything in your life.

Paying off your mortgage early

Many people are opting for the 30-year mortgage and taking steps to pay it off early. There are many options for homeowners who want to pay down their mortgage at an accelerated rate. Paying bi-weekly is one option. Simply paying more is another. As your salary rises, pay that much extra on your mortgage. You can also apply windfalls such as tax refunds and bonuses to your principal.

For more ideas about your mortgage options, talk to your REALTOR® and loan professional. They should have ideas to determine your best course of action.