Most people get a 30-year fixed-rate mortgage, which offers lower monthly payments. But there are still some cases where it may make sense to consider a 15- or 20-year mortgage. These loans will force you to make higher monthly payments, but they have lower interest rates and allow you to accumulate home equity much faster. If finding foreclosures is what you decide, you’ll want to find an experienced real estate agent who has access to a local multiple listing service and knows the local market.
“A 30-year fixed-rate mortgage isn’t always the best option for a consumer. Most people focus especially on monthly payments. But having a home isn’t just about putting a roof over your head. It’s part of it. of its general financial plan “. Said Brian Blonder, senior vice president of residential lending at Capital Bank NA in Maryland.
Here are five questions to keep in mind when making your decision.
- What are the cost differences?
Let’s say you borrow $ 300,000 to finance your home. A 3% 30-year mortgage will cost you $ 1,265 a month and $ 155,332 interest over the life of the loan.
Conversely, a 20-year mortgage at 2.75% will increase your monthly payments by $ 361. But it will reduce the total interest you pay for your home by almost $ 65,000. A 15-year mortgage at 1.99% will cost you an additional $ 661 a month, but will save you more than $ 108,000 in interest costs over the life of the loan. (Use this calculator to find out how much your mortgage payment could be.)
- What are the tax implications?
There are usually two major tax advantages to owning a home, regardless of the type of mortgage you get: the ability to deduct the mortgage interest you pay, as well as state and local property taxes.
But that only matters to you if you detail the deductions in your federal return not more a small minority of taxpayers do so because for most people it is more advantageous to take the standard deduction.
However, if you detail, ask an accountant if the tax savings you would make with a short-term loan, for example, with a 20-year mortgage, could make it affordable and therefore an attractive alternative to 30 years. , taking into account your financial goals.
For example, as long as you pay about $ 361 more a month for the $ 300,000 20-year loan In the example above, you may be able to reduce this amount substantially by saving your tax if, for example, the 25% tax bracket, Blonder said. For example, you save $ 2,062 in taxes on your interest payments alone for the first year. Divided by 12, this comes to $ 172 in tax savings per month. You also save $ 750 a year or $ 63 a month if you pay $ 3,000 a year in property taxes.
So now that the extra $ 361 monthly payments are actually just $ 126 more, Blonder explained.
You can do math similar to your 30-year mortgage – the net monthly payment will also be lower because of the tax savings if you detail.
Once you compare the two monthly payments after considering the tax savings, the question is: it’s worth it for you (and affordable) to spend a little more on a short-term mortgage in exchange for getting the estate faster and substantially reducing the interest you pay to own your home.
“If one of your goals is to build wealth, is it worth getting a little more and spending between $ 100 and $ 200 a month to substantially accelerate the growth of your net worth?” Blonder said.
- What else do you do with your money?
If you’re really stretching yourself financially to buy a home, a 30-year period may be your best bet because it offers the lowest monthly payments, and you may need every dollar left just to cover your other essential expenses.
But if you expect to have easy money left over each month with a 30-year loan, consider where you will get the most money for that money, suggested Mari Adam, a certified financial planner in Boca Raton, Florida.
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Since 1987, the annualized return on house prices has been 4.2%, according to the national S&P CoreLogic Case-Shiller house price index.
So, if you plan to deposit your extra cash into a savings or investment account that yields less than that, it’s best to look at that money instead of a higher monthly payment on a shorter loan. term or you pay the 30-year loan, Adam said.
But, he warned, “make sure you can make the biggest monthly payments without a doubt.” That is, you have enough emergency savings and other liquid assets to cover you in the event of a job loss or other unforeseen impacts on your cash flow.
- If you are refinancing, how much time do you have left in your current mortgage?
If you’ve been in your home for several years and want to refinance to get a lower rate, don’t opt for another 30-year loan, Adam said. “If you have 10 years left, refinance them for 10 years. [Otherwise] pay the highest amount of [total] interest. It simply replaces what you have left on your watch unless there is a mitigating circumstance. “
Under extenuating circumstances, it means an unexpected success in your finances, such as job loss or divorce, which can lead to the risk of losing your home unless you can substantially reduce your monthly payments.
- I want to pay for my house and, if so, why?
Are you someone who just wants to pay off your debts as soon as possible and pay less to the bank? If you can afford to hire one, a 15- or 20-year loan may be the best option, Blonder said.
As home buyers age, they may begin to think about what they want to leave their children or they just like the idea of no debts in retirement.
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Adam urges you to consider the counterargument for these two desires: you always have to do the best for you financially and this will depend on your needs and your expected cash flow from your retirement assets and fixed income, such as Security Social or a pension. .
“It’s not about your age. It’s about what leaves you in the best position to use your money wisely. Poor money is not smart. Having money in your pocket to have a better life when you grow up [is]. “
As for your kids, if you can live well and leave them something when you don’t leave, great. But if not, that’s fine, he said. “Your children can sort out their own lives.”