Is a Shorter Mortgage Smarter?

With today’s low interest rates, more borrowers find shorter-term options affordable. The monthly payment for a 15-year, fixed-rate $100,000 mortgage at 5.38% is $811 (principal and interest only), compared with $600 a month for the same amount borrowed for 30 years at 6%.

While the 15-year mortgage takes a bigger bite out of your monthly budget, it allows you to drastically trim the interest paid overall. In this example, you’d pay the lender nearly $70,000 less in total interest with a 15-year mortgage than you would over 30 years ($45,931 vs. $115,838).

If you can afford higher monthly payments, should you go for 15 years? Earlier freedom from mortgage payments and immense interest savings are two reasons for doing so. But before deciding, you need to ask yourself a few other questions:

Is there a better way to use that money?–When you put extra money into house payments, it’s like earning a return on that money equal to the mortgage rate, notes Jack Harris, research economist at the Real Estate Center, Texas A&M University, College Station, Texas.

“If that amount could be invested somewhere else at no risk at a higher rate,” he advises, “then you should pass on the 15-year mortgage.”

Do you need the bigger tax break?–You pay off a 15-year mortgage sooner, and thus the interest portion of your payments dwindles faster than with a 30-year. Same goes for your tax deduction for mortgage interest.

But for many borrowers, the tax break issue isn’t crucial and gets overplayed, Harris contends. “A lot of homeowners don’t even take the tax break” because it doesn’t exceed the standard deduction.

Is your income variable?–If so, you may want to avoid locking into higher monthly payments. You could fall short some months, risking default.

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