If you're willing to take a few risks, a fifteen-year mortgage is a good choice. The first is that you have to bet that you'll be able to pay the higher mortgage rate over time. If you own your own business, you are in charge of how you make a living. The next question is whether or not your business or career will still be as successful in fifteen years as it is right now. Are you in a business that goes up and down with the economy? Most are, and if your 15-year mortgage is already a stretch for you, it's a huge gamble. If you have a job and don't have to worry about the ups and downs of the economy, it's a safer bet.
How much money is there?
The amount of money saved is quite large. One tool for figuring out a mortgage compares the numbers that are made when a $100,000 loan is spread out over 15 years and 30 years. With an interest rate that is a quarter of a point higher, the monthly payment is about $735 for 15 years and about $955 for 30 years. The difference between the total interest payments is just over $100,000, or $169,000 vs. $64,000. But those are just raw dollar amounts. What is not taken into account is how much you will save on your annual taxes because of the higher interest rate on the 30-year note.
Other Ways to Handle Money
Several things that can't be seen or touched are also left out. Where would that extra money go if it wasn't going toward a 15-year mortgage? Maybe there are other ways to invest? Perhaps. But there's a reason why extra money like that is called "spending money." Most of us spend our money instead of investing or saving it. So, the thirty-year note might mean better family vacations, a few ski trips in the winter, or a nicer car. It definitely means that the family budget has more room to move.
There is a big benefit to paying off a mortgage in fifteen years, but there can also be a big risk. If you want a middle ground, think about getting a mortgage that lets you make accelerated payments on an as-needed basis. When your family's income is doing well, pay a higher monthly mortgage rate and your principal reduction will be bigger. With those payments, you'll be paying the higher (30-year) interest rate, so your annual tax deduction will also go up. You're cutting time off the mortgage and keeping your tax deduction at its highest level.
All the "what ifs"
Some money managers say that a 15-year mortgage is a sucker's bet because the "savings" from the lower monthly payment on a 30-year note and the "savings" from the higher tax deduction on a 30-year note would more than make up for the difference in total interest.
It's a great idea and probably has some truth to it, but how many of us will save the "savings" and "tax break" that come from the difference between a 15-year and 30-year mortgage? Pretty much none of us. Most people think of their home's value going up as their return on investment and stop there. In the language of a banker, a thirty-year note is probably worth it if it cuts your number of sleepless nights by 20% or more.
