Plot spoiler: Even if you can afford the higher monthly payment of a 15-year mortgage, consider getting a 30-year term, instead. Invest the difference, and in 15 years (with a 6% return) you’ll have enough to pay off the mortgage, and you’re not locked in to the higher payment
If you’ve had your current mortgage for more than about two years, now might be a good time to refinance.
This assumes, of course, that you’re planning to own your home for several more years and that you have positive equity (the value of house is more than the amount of the loan that you would be seeking). Interest rates are being held down by the Fed in an effort to get the economy going again, so it’s a good bet that they’ll stay low at least for the next few months.
I made a few calls and found that going rate for a fixed-rate 15-year term loan is about 4.65%, and the similar rate for a 30-year loan is 5.25%. If you’re only going to be in your house for a few years, then you can save a few pennies with an adjustable rate loan, but with fixed rates so low, you don’t really save much.
Example: A $200,000 loan
If you need to finance $200,000, the monthly payment for the 4.65% 15-year loan is $1,545. The monthly payment for the 5.25% 30-year loan would be $1,104 which is $441/month less. Over the life of the 15-year loan, you would pay a total of $278,165. Alternatively, if you chose the 30-year loan, you would pay a total of $397,587 – almost twice the amount borrowed. You might think that if you can swing the higher payment, you’re better off paying it off quickly. After all, who wouldn’t want to save $119,422?
However, there are some advantges to paying off your mortgage at the slower rate:
- You have less of your money tied up in a house, and
- If you lose your job, you’ll be grateful that you have a lower monthly payment.
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