Most people, when refinancing or buying a home, will choose a lower payment over a plan to eventually be mortgage free. The concept of owning your home free and clear may be a distant thought, but a 15 year mortgage works to make it happen. A changing economy is bringing into focus the need for long term financial planning, and the reduction of mortgage debt.
If you can afford the payments, a 15 year mortgage is how you can eventually live mortgage free, while in the meantime, save thousands of dollars in interest, when compared to a 30 year mortgage. There is a difference of approximately $120,000 in interest charges between 15 year and a 30 year mortgage, for a $200,000 loan amount.
Some argue that paying off your mortgage is not practical because you could invest the extra money and earn a higher return, while keeping that money liquid. However, the rate of return on investments is not guaranteed, while every dollar paid to reduce your mortgage balance provides a guaranteed return equal to the interest rate on the mortgage.
Another debating point about keeping a mortgage is the tax deduction benefit. Many people don't realize that in order to get an accurate picture of the tax benefit, you need to compare the standard itemized deduction to the mortgage deduction. Paying $20,000 in mortgage interest for the year to get a net write off of $2,000 is not a good reason for a 30 year mortgage.
How a 15 year mortgage works to benefit a borrower:
• Provides a fixed term strategy to eliminate your monthly mortgage expense.
• Incorporates the retirement of your mortgage into your overall retirement plan.
• Long term investment that guarantees a rate of return by reducing your debt.
• A future with less financial stress and the security of really owning your home.
• 15 year mortgage rates are usually a little lower than 30 year mortgage rates.
• Save a large amount of interest expense on a 15 year term instead of 30 years.
The goal of living without a mortgage payment is attainable. If you can afford it, a 15 year mortgage is how you can work to set a timeline to one day enjoy the benefits owning your home.