Is a 15 Year Mortgage Better Than a 30 Year?
Bills.com co-CEO offers tips to help plan home loan
SAN MATEO, Calif., July 18, 2007 - With today's savvy home-buying market, more consumers are considering the pros and cons of 15-year mortgages versus 30-year home mortgages -- and Bills.com co-founder and co-CEO Andrew Housser has tips for them to make this critical decision. "Home mortgages come in all shapes and sizes, from loans with 40- or 50-year terms to seven-year refinance loans designed for homeowners with a small balance," Housser said. "Following recent scandals about suspect lending practices that have resulted in a rash of foreclosures, lenders are making it tougher to qualify for a mortgage. Home buyers can ask several questions to find the best loan for their purposes." Housser's list includes:
- What payment can you afford? The mortgage industry is cracking down on bad lending practices such as misuse of prepayment penalties, low-documentation loans that allow or encourage borrowers to borrow more than they can pay, mishandled escrow accounts and too-high debt-to-income ratios that put a borrower's financial security at risk. "Still, be aware that you might be offered a mortgage with a higher payment than you are comfortable making," Housser said. "Choose a home loan amount with payments you believe are affordable for you, whatever the term."
- How long will you own the home? Loan terms matter most for those who are staying in the home longer. People who are sure they will stay just a few years could choose the product with the best up-front terms. For those planning to keep the home for a longer period years, consider whether you prefer somewhat higher payments knowing the loan's end is relatively near, or easier payments that go on for a longer period. "Also consider your family's life stage," Housser noted. "If a 15-year loan would mean mortgage payments would end just as your firstborn heads to college, the timing might make a shorter loan worthwhile."
- How important is total interest paid? On a home loan of $160,000, a 30-year mortgage at 7 percent annual interest would result in more than $223,000 in interest payments over the life of the loan. In contrast, a 15-year mortgage at the same rate costs less than $99,000 in interest. "Clearly, the savings in interest and in time makes shorter home loans appealing to many borrowers," said Housser. "But if you choose the longer-term loan, take heart -- the additional interest you pay will be tax-deductible for most people."
- How disciplined are you? "Many people argue that a 15-year mortgage and a 30-year mortgage can be made essentially the same," Housser said. "They believe homeowners should obtain a 30-year mortgage and then make extra principal payments every month to achieve the same goals as with a 15-year mortgage." Another option for a mortgage amortized over 30 years is to make one extra principal and interest payment per year. This will pay off the loan eight years sooner. (Divide one principal and interest payment by 12, and add that amount to the monthly mortgage payment to total one extra payment over the course of the year.) "If you hope to pay your mortgage off early, do you have the discipline to stick with this type of payment plan?"
- How much flexibility do you need? An advantage to a longer-term loan is that the payments are lower. On the same loan mentioned in #3 -- used to purchase a $200,000 home with 20 percent down -- the payment on a 30-year mortgage is $375 less per month than the payment for a 15-year loan. "Even if you can afford the shorter loan, choosing a 30-year term and paying an additional $375 principal each month leaves the option of using that money elsewhere if it's needed in an emergency," Housser explained. "Whichever you choose, it is a good idea to be sure the loan has no penalty for prepayment (paying the loan off early)."
- Do you have other debt you should pay off first? All things considered, a mortgage is relatively "good" debt. With every payment, you invest in your future. For most people, the interest is tax-deductible. And current home loan interest rates are fairly low. "But if you're like millions of Americans who owe thousands on credit cards -- with interest rates up to 20 percent or higher -- you would be wise to apply extra cash to paying off credit card debt before you focus on making additional payments on your mortgage loan," Housser suggested.
"Home borrowing has no one-size-fits-all solution," Housser concluded. "For the best outcome, take a clear view of your situation before selecting a mortgage product. Then be sure that whatever you choose, you make payments on time -- and enjoy your new home." Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and comparison shop for products and services including credit cards, debt relief assistance, insurance, mortgages and other loans. The company blogs about consumer finance issues at http://www.bills.com/. Since 2002, Bills.com and its partner company, Freedom Financial Network, have served more than 15,000 customers nationwide while managing more than $350 million in consumer debt. The company's co-founders and CEOs, Andrew Housser and Brad Stroh, were named Northern California finalists in Ernst & Young's 2006 Entrepreneur of the Year Awards.