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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2 comments:
Thanks for the advice. Something to keep in mind. I'm just mulling around in my head whether to get a mortgage soon or not. I put up a poll on my blog and so far no one thinks I should get a mortgage until I pay off my debt. I just have 3-4 more months left to pay it off; or I could use that money and put a down payment on something. You have a good point about not being penalized when things go wrong in the market or job.
Thanks for the article. We were contemplating the same thing. For our $200k house we could actually save over $100k in interest payments by going the 15 year route but for security sake it is good to have that cushion just in case something happens.
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