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Should You Opt for a Shorter Mortgage?

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Opting for a shorter mortgage

As the sun starts to set on 2012, this year will certainly go down as the “Year of the Record-Low Mortgage Rate”.  After all, rates have spent the entire year shattering new records!
So, should you take advantage of these all-time lows by opting for a shorter mortgage?
As of October 24th, the average rate on a fixed 30-year mortgage was 3.63%.  The average rate on a fixed 15-year mortgage was 2.66%.
OK, even if math isn’t your strong suit, you can see that the 15-year rate is considerably lower.  So, it seems like a no-brainer to go with the shorter mortgage, right?  After all, the sooner you can get your mortgage paid off, the sooner you’ll be out of debt.
Not so fast.
Remember, the faster you pay off your mortgage, the more you have to pay every month.  It’s like slicing a pie.  If you were to cut it into 30 pieces, the pieces would be much smaller than if you were to cut it into 15 pieces.
However, the story doesn’t end there.
If you’ve got the extra money to spend every month, opting for a shorter mortgage can be a great idea.  Just remember, the difference isn’t a couple of bucks here and there.  Depending on the amount of your loan, it can easily be a $500 difference.
Of course, it’s important to keep things in perspective.  If you tried to go out and get a fixed 15-year mortgage back in October 2006, instead of October 2012, you’d wind up paying 6.05% interest.  So, in the end, those larger payments aren’t nearly as large as they could be!
And in return for handing over that extra hard-earned money, you’ll get something very important – additional home equity.
Remember, the more equity you have in your home, the more power you have.  In fact, having a lot of home equity can give your credit score a boost.  It can also open up the possibility of home equity loans – making it possible to pay for those home improvements you’ve been dreaming about or for Junior’s college tuition.  If you had a 30-year mortgage, you wouldn’t have as much equity, so you wouldn’t have access to as many of those opportunities.
But there are some reasons to shelve the talk of shorter mortgages and go with the tried-and-true 30-year mortgage.
The biggest?  
The flexibility.
Let’s face it – you don’t have a crystal ball.  You don’t know what’s going to happen in 30 minutes, much less in 30 years!  And, at a time when unemployment is so high, do you really want to commit yourself to an extra few hundred dollars in mortgage payments every month?  All it takes is one pink slip to land you in a world of financial trouble.  (Sure, you’ll have problems with your 30-year mortgage, too, if you get laid off, but it’s much easier to come up with $1,000 than it is to come up with $1,500.)
Plus, you can always pay off a longer mortgage sooner if you want to.  You can’t take more time to pay off a shorter mortgage, though.
In the end, if you just can’t decide between a longer and a shorter mortgage, there is one more option – the 20-year mortgage.  While it’s not a popular as the 30-year and 15-year options, for some people, 20-year mortgages are the Goldilocks of the housing industry – just right!


 


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