15-year mortgage may not be best fit for you

A robust rainy-day fund is essential and may be one reason to avoid a second mortgage. (Flickr photo by Only Fabrizio)

The allure of a 15-year mortgage is inescapable: As everyone knows, the cost is lower than it is for a 30-year loan over the life of the loan.

How many folks do you know have held a mortgage for 30 years or even 15 years?  Even 15 years is twice as long as most Americans waited before selling and buying a new place — until the housing bust descended and caused a drag on the market.

The Wall Street Journal has done the math:

Say you have a mortgage of $300,000, and your financing options are a 30-year mortgage at 3.75 percent or a 15-year at 3 percent.  The 15-year would cost you $683 more a month. . . but in five years, you’d save $14,735 in interest and have $55,679 more in equity.  By year 15, you’d have saved more than $68,000 in interest.

That’s all well in good, but the math ignores a couple of other factors for a borrower to consider.

For one thing, what is the net saving after taxes?

Second, as the Journal and others acknowledge, not everyone can afford hundreds more dollars in mortgage payments every month.  Is it worth the drain on a household budget to undertake that extra obligation?

Third, there’s an opportunity cost.  Might there be a way — if not today but in the foreseeable future — to earn a decent return in excess of the interest saved by allocating your money to current investments or others yet to be explored instead of toward a 15-year mortgage?

Finally, closing costs could be a burden for anyone seeking to refinance from a 30-year to a 15-year mortgage.

It is a good idea to think out of the box.  Maybe a 30-year loan makes you uncomfortable because the rate is that much higher than for a 15-year mortgage.  Maybe a 15-year loan feels like too much of a stretch.  But maybe it is worth asking a lender to consider yet another length of time that makes sense.

If the primary attraction of a 15-year mortgage is to chip away at the principle more quickly than with a 30-year loan, then there’s no need to refinance at all: Just throw extra money at the lender every month that you can spare the cash.  But be certain to indicate that the money is for that purpose alone.

For homeowners thinking ahead to retirement, owning their residence outright is an appealing idea.

But it may not be the best goal if pouring money into a mortgage with a relatively short term causes undue anxiety and might be better used in other ways.

You probably can think of many ways to dispose of or use your capital.  Here’s one way that may not immediately occur to you, and its importance ought not be minimized: Building up a hefty rainy day fund like, you know, what you’d need to cover your monthly payments should you lose your job or suffer a terrible illness.

Tomorrow: Familiarity breeds. . .

To take your own bite out of the Big Apple, you have the option here to search all available properties privately.

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Malcolm Carter
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022

M: 347-886-0248
F: 347-438-3201

Web site

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