While many of my clients purchased homes over the years with the traditional 30-year mortgage, increasingly I see younger buyers opting for a 15-year mortgage. Why? It can help them build a bigger nest egg for later in life.
A recent Kiplinger article looked at the benefits and drawbacks. It noted that people in their 20s are dealing with student loans, marriage and children. Then in their 30s and 40s are facing obligations like college tuition and elder care. When they are in their 50s, many wish they had focused more on saving earlier in life.
For those who qualify, a 15-year mortgage can help reduce financial challenges that often persist through middle age. The most significant difference is the length of repayment and its impact on finances. Although a 15-year mortgage comes with higher monthly payments, it offers remarkable long-term savings.
- Faster Equity Building: Paying off the mortgage in 15 years allows one to build home equity more rapidly, giving financial security sooner.
- Significant Savings: Opting for a 15-year loan can save thousands in interest payments, making it a smarter financial choice over the long haul.
- Early Mortgage Freedom: Be mortgage-free a full 15 years sooner, giving you the freedom to reinvest in other areas, such as stocks, bonds, or even additional real estate.
There are drawbacks including:
- Higher Monthly Payments: A shorter loan term means a higher monthly payment, which can be challenging for some buyers to manage.
- Tougher Qualifications: Some lenders may require higher financial standards to qualify for a 15-year mortgage.
- Less Flexibility: With more income tied up in mortgage payments, you may have less flexibility for other financial goals.
Of course, homebuyers have to know what they can afford. The 28/36 rule is a great guide suggesting that no more than 28% of your gross monthly income should go toward home-related costs, with no more than 36% allocated to debts. And homebuyers should have three months of payments in reserve in case of a financial emergency.
The best advice I give any home buyer is to speak with a mortgage expert who can evaluate the situation and determine what mortgage best aligns with their personal goals.
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