Most homebuyers opt for 30-year mortgages, and that can make a lot of sense for many people. But don’t do so without considering a 15-year one.
With a 15-year mortgage, you’ll enjoy a lower interest rate, will pay less in interest over the life of the loan and will build equity faster. In exchange for these benefits, you’ll make higher monthly payments.
With a 30-year loan, although your payments will be lower, you’ll end up paying much more in interest, and your interest rate will be higher. But the payments can be more affordable, and you may be able to buy a bigger home.
Consider this example: You take out a $200,000 mortgage. With a 30-year loan with an interest rate of 6 percent, you’ll likely pay more than $200,000 in interest over the life of the loan. If it were a 15-year loan at 5.4 percent, you would pay less than $100,000. That’s a massive difference, don’t you think?
Still, consider the question from lots of angles. Know that it can be dangerous to take on more debt than you can handle. Make sure you can afford the monthly payments and won’t be living too close to the edge. Make sure you’re not neglecting saving and investing for retirement just to swing a 15-year mortgage.
If you opt for a 30-year loan and enjoy lower payments than with a 15-year one, can and will you invest the difference? That can be an effective way to build wealth. Another clever trick is to take out a 30-year loan, but treat it like a 15-year one, making extra payments against the principal every month. (Be sure to get a mortgage that permits you to do so.) That way you build equity faster but aren’t strictly tied to the higher payments.
Finally, don’t be misguided about taxes. Yes, a longer loan will give you heftier interest deductions – but that’s only because you’ll be paying so much in interest. It’s better to pay less interest, if you can.
Ask the Fool
Q: I just opened a brokerage account with an auto- investment feature that will let me regularly invest in an S&P 500 index fund. Should I wait until the market hits bottom before I begin investing? I opened a Roth IRA last month that lost 14 percent already, so I’m nervous. – J.W., online
A: The problem with waiting for a market bottom is that we can’t recognize it until it has passed. So you might be on the sidelines when the market begins recovering. It can be costly to be out of the market on days when it rings up big gains. On Oct. 13, 2008, for example, the S&P 500 surged nearly 100 points, or fully 10 percent. Those who would have wanted that gain but were waiting lost out.
If you’re nervous about where the market is headed, do what you’re doing: Gradually invest money over time (this is dollar-cost averaging). That way you’ll get shares when they’re both lower priced and higher priced and won’t have to keep guessing about the market’s direction.
Don’t fret too much about a one-month loss – what matters is that you choose good investments and are focused on long-term performance.
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