My wife and I are buying a home this summer and we’re pretty confident on what we’re going to buy based on the local marketplace: a pre-owned four bedroom house. We’ve looked at several in our price range and we’re getting set to make a move.
One major part in this decision is determining whether or not to get a fifteen or a thirty year mortgage. A fifteen year mortgage means larger monthly payments, but it also means a lower interest rate and far less interest paid overall. A thirty year mortgage means smaller payments each month, but a term that’s twice as long and a lot more interest paid over the life of the loan.
To decide which one was right for us, we asked ourselves a number of questions; these questions may be useful to you as well in determining what kind of mortgage you should apply for.
Are we going to be living in this home for a while? The longer we’re in the home, the more appealing the fifteen year mortgage is. If it looks like a move may be coming in the near term, a thirty year mortgage is better because it keeps our finances more liquid as we prepare to move.
What sort of payments can we afford? This is something of a trick question. For us, it’s not really a matter of how much we can squeeze out of our budget; instead, we have set a monthly amount that we feel comfortable paying. In short, if we aren’t comfortable with a fifteen year mortgage but will go for a thirty year mortgage solely based on the monthly payment we can afford, we’re borrowing too much. Even with the thirty year, we would be pushing our budget very hard, something we’re not comfortable with.
Are we comfortable living with what we can afford? Thankfully, we’re comfortable with the homes that are in our budget range in our area, but if we were not, we would stay put renting until we could afford what we’re comfortable with. We live in a situation where rent is substantially lower than our monthly payments will be (as do most people who rent), so we would stay where we’re at and keep saving for a while longer.
What are our plans in fifteen years (and longer)? We will have a high school aged son and another one who will be either in late junior high or high school. This is a point where we could move into a nicer home and still have time for the new house to feel like home to the children before they leave the nest. We eventually want to have a nice big home for family Christmases; my wife’s grandparents used to have them in their home until very recently, with lots of family coming in from out of town and filling up the bedrooms and the living room floor with cousins and uncles. We eventually want a home like this, and we both feel a fifteen year mortgage better reflects these values than a thirty year one.
In short, we’re choosing a fifteen year mortgage because we can afford it on a monthly basis and because it fits in with our overall goals (family and thriftiness). If you’re trying to decide which one is right for you, ask yourself these questions and see what the answers reveal to you.