It’s almost spring, and in Michigan that heralds the start of the busiest season for home selling and buying.
With interest rates currently at four-year lows, it’s a great time to buy your dream home. Lower rates mean lower payments, and you can buy more house for your money. The majority of home mortgages consist of the 30 year variety, but if they can swing the higher payments, the 15 year mortgage is the better deal for most buyers.
Thirty years is a pretty sizable chunk of anyone’s lifetime. These traditional mortgages, available for generations, were designed in the day when a young couple bought a home, raised their family, and paid off the house a few years short of retirement. That scenario doesn’t apply to as many people today, but there are plenty of good reasons to opt for the 30 year mortgage. Not only does a lower monthly payment free up extra cash for other purposes, but a temporary setback – job loss, illness, injury – is less devastating with lower mortgage payments.
15 Year Mortgages
The biggest benefit of a 15 year mortgage is the fact that you will pay off your mortgage in half the time of the traditional 30 year mortgage, at much less overall cost. That means you are making higher monthly payments, but you save a great deal on interest over the loan’s life. You also build equity in your property much faster.
Principal vs. Interest
In an initial payment on a 30 year mortgage, approximately 2/3 goes toward interest and 1/3 toward paying down the principal. With a 15 year mortgage, the opposite is true. It’s not until the 18th year of that 30 year mortgage that the interest/principal ratio is the same as the first payment of the 15 year mortgage. By then, the homeowner with the 15 year mortgage has owned the dwelling outright for three years. The downside is that monthly payments for the 15 year mortgage are much higher, making the 15 year mortgage a nonstarter for many borrowers.
If you would like to pay down the principal on your mortgage but can’t afford the payments on a 15 year loan, there’s an alternative. If your mortgage doesn’t include a prepayment penalty, you can add money to your monthly payment indicating that the excess go towards paying down the principal. That way, you can pay down your mortgage when you have the extra funds. Another $50 or $100 per month makes a big difference over time.
Other Low Interest Rate Benefits
Even if you aren’t in the market for a new home right now, you can still benefit from the low interest rate environment. Save money on your current mortgage by refinancing, or utilize the equity in your home with a Cash-Out Refinance to:
- Payoff or consolidate debts and deduct the interest
- Finish that renovation so your family can get more enjoyment out of your home
- Invest or start a business
- Or better yet – take that vacation to provide an unforgettable experience with your family.
Refinancing may allow you to eliminate private mortgage insurance, if your home’s value has increased sufficiently. It’s important to calculate whether fees involved in refinancing aren’t more than you’d save in getting rid of private mortgage insurance. Usually, refinancing makes sense.