For our most recent mortgage in 2003, we were weighing the pros and cons of a 15 year versus a 30 year mortgage. We liked the lower total payments of a shorter mortgage, and could handle the higher payments, which made a 15 year term attractive. However, we finally decided on a 30 year mortgage, since there was only a small difference in interest rates, no penalty for an early pay off, and additional payments would be used to reduce principal. Thus, we had the flexibility of paying either the higher 15 year payment, when able, or paying the 30 year payment, if funds were tight.
In hindsight, our choice was a great decision, due to the financial crisis of 2008. From 2003 to 2007, we were able to make additional payments, which effectively reduced our term to 15 years. However, in October, 2007, I took retired early in my forties, and then the bear market of 08-09 occurred, which significantly reduced our retirement savings. As we made choices to conserve cash, we were able to reduce our mortgage payment to the the 30 year level, which saved us about 31% versus the 15 year payment.
Since our mortgage was a 30 year term, we were not penalized by our lender, because we were meeting the terms of the original contract. If we had taken a 15 year mortgage, we would not have had the same flexibility to reduce our payments, with incurring penalties or possible foreclosure. Thus, choosing a 30 year mortgage gave us flexibility make higher payments, like a 15 year mortgage, or lower payments when financially challenged.
Based on our experience, we will always choose a 30 year mortgage for future real estate purchases, provided the interest difference is small, there is no penalty for early payoff and additional payments are applied to principal.
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This is not financial or real estate advice. Please consult a professional advisor.
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