Whether a buyer seeks a 15- or 30-year mortgage is based on their plan for their life, but both present unique advantages that should be hammered out before committing to one over the other.
A lengthier term has a lower rate, allowing a consumer to have more money for education, household goods, vacations and paying off higher-interest bills, which is a reason “to keep more of your money,” according to Kevin Parker, the vice president for field mortgage originations at Navy Federal Credit Union.
Plus, added inflation reduces monthly payments in real dollars.
“A 15-year is attractive to persons with a lot of cash on hand, who don’t want to be burdened with long-term debt, who have the money to pay the higher note,” Parker added.
“The longer term you can go out, the better, since you’re holding on to your money at a lower rate,” John Tomasello, a vice president for consumer mortgages at Burke & Herbert Bank said. But he “absolutely” recommends 15-year loans to those who can afford them.
“A 15-year loan and its higher payments make it tougher when an emergency happens,” Ana C. Tolentino, senior loan officer at Atlantic Coast Mortgage, said, but she, too, recommends them.
For a hypothetical $500,000 mortgage, Tomasello quickly figured up the difference in monthly payments between a 15-year loan and a 30-year which came to about $1,200 less for the longer term, based on last week’s rates.
But, paying one month’s principal early on the front end of a 30-year loan can shave several years off a loan life, Tomasello said. And, by making extra principal payments during the life of the loan, borrowers can reduce their balances owed since lenders can only charge interest based on balances.
Tolentino said many older mortgagees don’t want to be burdened with a monthly obligation when they approach fixed income status.
She and Tomasello both mentioned lower monthly obligations with 20-year mortgages, which are sometimes overlooked. “It has a little bit higher interest rate,” Tolentino said, “but it cuts years off your loan.”
And then there are adjustable-rate mortgages. Remember them?
“They get such a bad rap,” Tolentino said. “Many don’t have the best feelings about them,” — but — “they are not such a bad idea, for five, seven, or ten years” out when older persons may be thinking later about moving to a retirement home, assisted living or moving in with family.
The interest rates for adjustable rate mortgages are slightly lower, and last week on the web, they matched rates (three percent) for 15-year loans.
According to the terms, their interest fluctuates every few years, and the rate can actually diminish.
“They make sense if you are going to sell your home in five or seven years, and they are not a lot of risk,” Parker said.
He should know since he got one four years ago.
Timing is critical for these loans “which have a lower interest rate because risk is reduced and reset every five years or whatever the term is.”
In 2017 the U.S. Census Bureau estimated that 63 percent of homeowners have mortgages of which 90 percent are 30-year loans, according to a report the same year by Freddie Mac, the government entity which buys mortgages and sells them to investors.
“The internet has plenty of tools to calculate which route is the best for the consumer,” Parker said. “We try to recommend to our members what’s best for them. There’s not one answer. Each situation is different.”
“It all depends upon circumstances and the client’s goals and needs,” Tolentino said separately. Before applying for a loan, “you should figure out your goals and what’s really important to sacrifice.”