This may be a question to the Mortgage officer or lender who is trying to get your loan approved and processed. But I get this question a lot of times from my client. May be they just want to hear from me being such a financially knowledgeable and CFP candidate. And I don’t mind answer them to help and guide them on making a smart decision. After all, that’s what I claim myself as, Smart Houston Realtor.
There is no straight forward, constant answer for this question. It changes depending on the borrowers situation. So I cannot really give one answer for this question. Before I can answer them, I ask them few questions like,
What is your financial situation? Do you have any other debts?
Do you have good standard income to consider higher monthly payments?
How long do you plan to stay at this home? After that, do you plan rent or sell?
What is the Interest rate for 15 vs 30 years?
Are you expecting any future expenses like kids birth, education etc.,?
The answers for these question will help analyze the borrower situation and find the solution accordingly.
For example, let’s say they say they are financially sound, no other obligations, expect to have standard income forever. I will ask to check the mortgage payments for both 15 vs 30 years using the calculator to see whether they have stomach for higher payments. If they do, I would recommend them go for 15 years loan payment and pay it off quick and get out of the mortgage. But if their income won’t be constant and expect future need, I strongly recommend them to go for 30 years mortgage and avoid locking them on to high payments. Also if you plan to stay longer, 30 years works well as well. 15 year mortgage basically helps to pay off quicker and less interest with higher payment and get off of loan faster. You will build more equity with the 15 year loan compared to 30 year loan in short period. We can argue both ways but it all depends each borrower situation basically.
I would recommend them to try to get the GFE(Good Faith Estimate)/Estimate for both mortgage. Next, check out the amortization schedule for both rates and find out how much interest you will be paying extra for 30 year loan vs 15 year loan. If you are getting a big rate difference and good interest saving, go for 15 years compared to 30 years. It is always good to save on interest payment using less interest rate considering long term.
Another argument I hear from client is that you get more interest from 30 year loan which can be tax deductible. That’s not a smart way of looking at it. You are paying more interest and you are getting some tax deduction to get them back depending on your tax rate. Also you only get tax deduction when you file itemized deductions which many might not qualify. Let’s say you paying $100 interest and your tax rate is 20%, you are going to get only $20 back via your return. With 15 year loan, you might pay even less than $80 interest($100-$20 deduction depending on the interest rate which is better compared to 30 years even after tax deduction. They just think that higher interest can get higher deductions but they are not taking full picture into account.
I personally like 30 years mortgage because it gives you the flexibility to have lower monthly payment, long term and no pressure on higher payments. Also you can pay additional amount every month and speed up the payoff period and even bring it down to 15 years depending on how much you are additional payment would be. With 15 years, you have to pay high payments and no choice whereas 30 Years loan your monthly payment can be remain low but you can still pay towards principal amount changing your balance as you pay additional amount, reducing it lower every month.
I also like to keep my homes as asset when I move out of the home. So I prefer 30 year loan which works well since I can pay off from rental income and build equity and don’t have to make extra payments if you have higher payments. Also you should be able to cover every thing including taxes, insurance with your rental and have some cash flow with less mortgage burden. Cash flow is always good.
In conclusion, it’s little bit tough decision to make but if you analyze properly and answer the above questions, you can easily figure out your answer. If you have big stomach for higher payment and want to build equity fast, go for 15 years. If you don’t care for equity and like to pay slow and have the flexibility to pay off more when you can then go for 30 years. That would be my answer and use my suggestion with your own discretion.