If we were not changing this home into a rental property within 6 months, I would say they are right.
It’s an excellent time to refinance your home down to a 15 year mortgage. Likewise, if you’re in the market for a new home, you may never find a better time to go with a 15 year mortgage. Take these reasons:
15 Year Mortgages are Popular
Rates are shockingly low. My mortgage rates table is showing rates near 3.5%. That’s low for this year, low for the last ten years, and just flat out historically low. It’s basically rock bottom. With rates this low, many people can move to a 15 year loan and maintain the same mortgage payment amount.
Ed over at The Happy Rock just did this type of refi and kept basically the same monthly mortgage payment. Had we been committed to this place for the long haul, this is what we’d of done.
The perceived risk in the stock market. Justified or not, many people aren’t comfortable with the stock market. They’d rather stick their money in a hard asset. It doesn’t get any harder than the asset you live in, your home.
By moving to a 15 year mortgage, you are betting that the increased investment in your own home (via the slightly higher mortgage payment) will be a safer payoff than stocks. I’m a believer in stock for the long run, so I don’t advise dumping your stock investing for a single investment, your home. Still, I see the appeal.
Nowhere to get a return. If you can’t stomach the market, then where else do you turn for a decent return? There aren’t that many solid places really. Especially none in the traditional channels: savings, CDs, etc.
If you put more money in your home (again, via the increased payment), then at least you are investing in something you can touch and feel; something that is providing security for your family.
Of course, there are some factors you need to consider if you’re considering a 15 year mortgage refinance. Like, “how long will you be in the home?” Or, “are the rest of your finances on track?”. If you just bought the home, then a refinance doesn’t make sense, and if you aren’t making your retirement contributions regularly, then you probably can’t afford a slightly higher mortgage payment.
History of the 30 Year Mortgage
What about when you buy your first home? How do you decide whether to go 15 or 30 years? Most people naturally default to the 30 year mortgage. But this wasn’t always the case. 15 year mortgages used to be the norm, and they still are in most other countries.
The 30 year mortgage came along after the Great Depression, when the housing market collapsed. At the time, 30 year mortgages made sense because people lived in their homes that long and 30 years covered the typical earning years of the average U.S. worker. Nowadays you can’t get people to stay in a home for more that 5-10 years. But the mortgage is still around and still the most popular.
I certainly weighed the 15 year option when we purchased our home. We could have afforded the payment. But, ultimately, we wanted the flexibility that comes with a 30 year mortgage. Hey, if they’ll let us borrow for that long, why not?
Also, we said we’d just pay more in principal each year to effectively end our loan in 15 years. Did we do that? No. We never did. We just worked on our other financial goals (debt, retirement, etc.) and enjoyed our relatively low interest rate (5.375% back in 2007) and tax deduction.
Benefits of the 15 Year Mortgage
If you’re thinking about doing a 15 year mortgage or refinance, here are some of the benefits you’ll enjoy:
Better Rates – Since you’re borrowing money over a shorter period of time, lenders will extend a much lower interest rate on your mortgage. This, of course, results in savings on the amount of interest you are paying compared to a 30 year mortgage. A better rate also means bragging rights with your financially savvy friends. People love comparing mortgage rates for some reason.
Pay Down Principal Faster – With a 15 year mortgage your first mortgage payment will include much more principal than a 30 year mortgage payment would provide. And in 5 years, you’ll actually have paid down a decent amount of principal. As opposed to a 30 year mortgage, where you really only pay interest the first 5 years.
Less Paid in Total Interest – All things being equal, you’ll pay more interest on the longer loan term. By going with a 15 year mortgage, you are shortening your loan term and so over the life of the loan you’ll pay less in interest. Plug your numbers into a 15 year vs 30 year mortgage calculator to see the huge difference.
Gets it Over With – One last benefit that I know of is the emotional satisfaction that comes with owning your home. A 15 year mortgage could leave you without a mortgage before your kids are out of school. Imagine what you could do with that mortgage payment: help your kids with their college education, consider early retirement, travel more, etc.
Did you recently purchase or refinance for 15 years? Why did you make that decision?