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Mortgage Refinancing Does Size Matter After All? By Benjamin Morgan
Hopefully your ego has never had to experience the words, “It’s okay honey. Size doesn’t matter.” After all, what’s important is the quality right? In a perfect world, perhaps this is true, but in the realm of home mortgage refinancing, what is best is usually based on length. Let me explain. The majority of home mortgages are given at terms of either 15 or 30 years. This simply means that if you have a home mortgage of $150,000, you will have to pay it off in pre-calculated payments (fixed mortgage) over the next 15 or 30 years depending on which loan you have chosen. Both long term (30 years) and short term (15 years) loans have their benefits and drawbacks. With a long term loan, you are going to benefit from having significantly lower monthly payments. This makes sense because the loan amount is spread out over a longer period of time. However, because the length of the loan is extended over 30 years, you will be paying higher interest rates and subsequently, more money in interest as opposed to a shorter termed loan.
On the other hand, a home mortgage loan with a length of 15 years is going to have a much higher monthly payment than a 30 year home mortgage. However, the tradeoff is that you are going to pay much lower in interest due to shorter terms carrying an overall lower interest rate.
Some financial analysts recommend a 15 year home mortgage as the best home mortgage loan. They believe that although you are paying more monthly, you benefit from having the home mortgage paid off quicker which saves thousands in interest. Also, by paying more on your home mortgage in a shorter period of time, you are increasing the rate at which your equity is being built.
Yet again, other lenders and economists recommend the 30 year home mortgage for the lower payments and tax benefits. If you are concerned about length, they recommend purchasing a 30 year home mortgage (minus prepayment penalties) and pay extra on the principal. This allows you to benefit from the lower monthly payments and tax benefits as well as having the loan paid off in less than 30 years.
The “best” home mortgage length for you depends on what you are willing to compromise on. Both 15 and 30 year loans have their advantages and disadvantages. My advice is to use a home mortgage payment calculator and see which term works best for your financial situation. Regardless of the choice, take pride in knowing that you are a homeowner.
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