While considering their options in refinancing mortgage loans, many people are asking themselves if a 15-year or a 30-year mortgage is the best option. Let's take a quick look at both options from a financial point of view and look at the clear advantages and disadvantages of both are.
An Example of Both Loans as well as Their Costs
Assume for a split second that you are looking at refinancing mortgage loans of $100,000. If you were to do a 15-year loan at say 5% interest, the payment on your mortgage loan would be about $800 each month. The full amount of interest paid over the 15-year time would be about $42,000. Because your mortgage interest is tax deductible, this makes your total interest paid more like $32,000 over the 15-year life of your loan.
By applying the identical math to a 30-year fixed mortgage at 5.5% interest, your monthly payment is about $575 each month, about $255 less than the 15-year mortgage, but the interest over the life of the 30-year loan would be about $46,000 after tax considerations.
Advantages and Disadvantages to Each Option
So, in the example above, if you look barely at the actual costs, you will see that the 15-year mortgage is clearly the cheaper option of the two. You will be mortgage free in half the time and you will a smaller amount for your home as well. However, each month you will be paying an additional $255 per month on your mortgage and might have invested that money into your IRA or into the stock market. And, you are also stuck with the higher payment for the life of the loan regardless of what else happens in your financial life.
With the 30-year mortgage option, you can clearly see that you will have the extra $255 each month to do with as you please. Most investments, even very conservative ones, will net you a return of more than 5.5%. If you were to take that extra $255 each month and invest it, at even 6%, after the 15 years you would have more than $65,000. At this point the balance due on your mortgage isn't much larger than that and you could easily pay it off. This would actually make the 30-year loan cheaper in the long run!
While the 30-year mortgage could be the better option it does rely on the fact that you have to have discipline and save that extra $255 each and every month. While some people have this dedication and discipline, a lot of us do not. Simply by paying the extra $255 to our mortgage would insure that we have an regular savings plan in place and we would be mortgage free in 15 years. In addition, investing until the end of time involves some form of risk. What if you choose to invest your extra money each month and do not see the rate of return higher than your mortgage payment interest would have been? There are unknowns to this scenario. While no option is right or wrong for everyone, refinancing mortgage loans for a better interest rate is always a good decision. Choosing whether or not you wish for a 15-year or a 30-year mortgage is a more personal choice.
On most of the occasions whenever the mortgage rates fall people run for refinancing mortgage loan. Refinancing mortgage loan can reduce your rate of interest and can help to extend the duration of repayment. It also helps to reduce your periodic payment compulsions in many ways, reduce the risk and helps to liquidate the equity that has mounted up in the real estate property during the period of the ownership. To get a refinance done on your mortgage, your home must have enough value so that you can justify your new loan.
In the real sense, refinancing mortgage loan can lower down your monthly payments due on the mortgage loan either by refinancing it into a lower interest rate mortgage or by increasing the duration of the mortgage loan, so that you can do the repayment over a long period of time. The cash saved in this can be used to pay the principle amount of the mortgage loan by reducing the payments further. In another way, refinancing can be used to convert available equity of your house into liquid cash, which can be used for other purposes or expenses like child's higher studies or repair and restructuring of house.
Refinancing mortgage loan reduces the risk related with your existing loan. If you refinance your mortgage loan from adjustable rate mortgage to fixed rate mortgage then you can avoid the risk of fluctuating interest rates, and can ensure yourself a steady interest rate over the period of the mortgage.
Consider following tips if you are planning to take a refinancing mortgage loan:
- You should take quotes from at least four to five lenders so that you can compare the quotes and go for the best refinance deal. [ - It is very vital to know what are the closing fees, lender fees, and other third party fees. Since increased costs can sabotage the benefits received low interest rate payments
- Before taking any decision on refinancing mortgage loan you should study the market properly and search for the best refinance deals you can get around. While comparing, make sure that you compare the Annual Percentage Rate (APR), which is the annual rate inclusive of additional cost on the mortgage.
- Negotiate the interest rate with your lender. Even if you go to a new lender, you can negotiate the interest rate. While negotiating the interest rate always keep other refinance related fees in mind. Make sure that your lender does not charge you any extra amount of fees against lowering your interest rates.
- You should understand the fees that are negotiable or can be avoided for saving money on your mortgage. There are lender related fees, which may be negotiable and government related fees that are generally not negotiable. If you are successful to negotiate a lower fee, just make sure that it doesn't increase the interest rate.
- Before riding on the refinance bandwagon, make sure that you plan o stay for a substantially long period in the refinanced property. This will help you avail the maximum benefit of low interest rate refinancing mortgage loan.
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