WHICH LOAN IS THE BEST OPTION FOR YOU?
As mortgage rates creep higher, the Banks start to encourage borrowers to consider the 15 year mortgage option. The reason for this is that the delta or difference in rate is greater when considering the 15 year versus your existing 30 year mortgage.
The spread between the 15 and 30 has been as little as .5% and currently is at .875%. The greater the difference the more sense that the choice of the 15 year mortgage makes.
In my opinion the 15 year mortgage only makes sense for the person with plenty of excess income and reserves so that they can easily handle the higher payment in the event of a change in their finances.
Most borrowers seem to think along the lines that they can handle the payment today and of course they want to pay off their mortgage in the shortest time possible so they chose the 15 year mortgage.
What these people fail to consider is that 15 years is a long time and a lot can change in that time especially for those of us who are getting older. Retirement, job change, divorce, and injury/illness can all have a drastic impact on our monthly cash flow. Even if you are trying to buy another property the higher payment with the 15 year could prevent you from qualifying for another mortgage.
Based on current Market conditions we have benefited from rapid appreciation but we all know that the higher values will result in higher property taxes going forward which are added into your house payment.
Even with the 4.125% for the 30 year and the 3.25% for the 15 year the payment is still 46% higher or $698 on a $320,000 if you elect to do the 15 year mortgage.
The higher payment could put undue stress on your cash flow and possibly force you to sell your home.
In my opinion the better option is to prepay the 30 year mortgage with the 15 year payment. By doing so you would pay off the mortgage in 16.25 years instead of 15 years. In looking at the longer term you need to remember that the additional payments are interest and therefore tax deductible and you need to consider what the cost of money will be in 15 years.
I like to think of the 30 year option as an insurance policy to protect you by giving you flexibility with the monthly payment. To me the savings with the 15 year is not worth the risk you are taking on.
Senior Loan Officer NMLS#309188