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Mortgage

Should You Get a 15-Year Mortgage?

Does it make sense to get a 15 year mortgage? Or should you stick with the more common term of 30 years? There is no “right” answer, but here are a few questions to ask yourself.

Do You Hate Debt?

The first thing to think about is how you feel about debt. Are you okay owing a bank a lot of money? And by “a lot” we mean hundreds of thousands of dollars?

If it doesn’t bother you because it’s “good debt,” then maybe a 30 year mortgage will work just fine for you. But not everyone is okay with owing so much money to a bank.

Do you want to be out of debt as fast as possible? Yes, your home does have value and you can always sell it if necessary to get out from under the debt. But maybe you don’t want to rely on that and are ready to own a place free-and-clear.

In that case, consider a 15 year mortgage. Yes, you’ll be paying it off for 15 years (assuming you don’t pay extra principal and pay it off even sooner.) But at least it’s not 30 years! You’ll be debt-free much faster.

Can You Get a Better Return on Your Money?

Another thing to think about is the opportunity cost of going with a 15 year mortgage instead of 30 years. In economics, your opportunity cost is the price you pay by choosing one thing instead of another.

For example, let’s say you go with a 15 year mortgage at 3% interest and it costs you an extra $300 a month compared to a 30 year mortgage. No problem, right?

But what if you had gone with a 30 year mortgage instead, and pumped that $300 into the stock market and it grew at 8%? That would give you an extra 5% on your money, which adds up over time.

Or maybe you own a small business and can use that $300 to grow it. If you can turn $300 into $500 every month, that means you’re making ($500 – $300)/$300 = 67% ROI on your money. That’s a lot better than both the stock market or interest rate on your mortgage.

Do You Have an Emergency Savings Account?

The news reminds us everyday that COVID has wrecked our economy. Millions of Americans are out of work for the foreseeable future. Millions more are underemployed, meaning they took lower-paying jobs than they’re capable of just to keep food on the table and the lights on.

While an emergency savings account won’t last forever, it does provide the buffer you need to weather these kinds of storms. Everyone experiences tough times, but having some extra money in the bank will make sure you get through it okay.

If you do have an emergency savings account built up, that’s great. Maybe a 15 year mortgage will work for you. But if you’re still building up your savings, maybe it makes sense to go with a 30 year mortgage and build up that savings account with the money you save compared to a 15 year mortgage.

Conclusion

What do you think? Are you leaning towards going with a 30 year mortgage so you can allocate money elsewhere? Or do you hate the idea of buying your house for 30 years, so you’re going with a 15 year mortgage to be done with it? Either way, let us know how we can help. Send us an email at sal@arcusvamtg.com – we look forward to hearing from you.

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