Record-low interest rates may put a 15-year mortgage within your reach, boosting your arsenal of financial planning strategies for managing debt. What are the pros and cons?
Record-low interest rates are putting a 15-year fixed-rate mortgage within the reach of an increasing number of prospective home buyers. Should a shorter-duration mortgage be among your financial planning strategies for managing debt?
Mortgage rates for 15-year fixed-rate mortgage averaged 2.86 percent across the nation, according to the latest Freddie Mac data released last week. In comparison, interest rates for a 30-year, fixed-rate mortgage were an average of 3.56 percent. What does that mean to a prospective buyer evaluating different financial planning strategies for financing a home?
(Lower interest rates are also prompting current home owners to considering refinancing existing mortgages.)
Assuming a purchase price of $160,000 (the approximate median home price in the U.S.), a 20 percent down payment and the average rate of 2.86 percent, a 15-year fixed-rate mortgage would cost $875 a month and charge $31,873 in interest over the life of the loan. A comparable 30-year, fixed-rate mortgage would cost $597 a month and charge $86,753 in total interest.
“If you can afford this route, it’s a no-brainer,” according to a Broker Outpost article, “you will save tens of thousands in interest and it sure would be nice to have your home paid off that much sooner!”
At first glance, a 15-year mortgage may seem the better of the two financial planning strategies, but most buyers have more on their minds than buying a home. Other financial needs, including retirement, college costs, property and income taxes, home maintenance, transportation and other expenses, compete for money budgeted for mortgage payments. The combined pressures may make it difficult, if not impossible, for a home owner to aggressively pay down a mortgage.
(Investors consider managing debt to be one of the most important financial planning strategies.)
A 15-year, fixed-rate mortgage may not be the best of financial planning strategies for a home owner who would struggle to make monthly payments. In such a scenario, a home buyer risks falling behind on contributions to retirement accounts, foregoing tax-deferred growth of investment gains and possible employer matches. Higher mortgage payments could also interfere with college savings goals, or lead a home owner to take on credit card debt to pay monthly bills.
Before you make a 15-year mortgage one or your financial planning strategies, ask yourself, “Can I really afford it?”