Is a 15 Year Mortgage A Better Option?

Interest rates are low, home values are high. People are asking: Should I purchase with or refinance into a 30 year or is a 15 year mortgage a better option? Stay tuned…

Nobody wants to pay more interest than they need to but currently, interest is low. Is a 15 Year Mortgage A Better Option? 

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SPEAKERS

Alex Okugawa 0:00
Interest rates are low, home values are high, people are asking, should I purchase a home or potentially refinance my current home mortgage into a 30 year or a 15 year? We’re going to discuss it stay tuned.

Alex Okugawa 0:24
Alright, Anthony, so nobody wants to pay more interest than they need to, but interest rates are currently low. So paying off a mortgage faster, does reduce the lifetime interest payments. But does that mean people should necessarily be rushing into a 15 year mortgage?

Anthony Saffer 0:41
Yeah, it is a question that comes up quite a bit, what we need to understand first is that, typically a 15 year mortgage is going to have a lower interest rate. So not only do you get it paid off faster, but you pay less interest overall. So hypothetically, if you had a $400,000 mortgage, let’s just say the 30 year rate is 3%, the 15 year is 2.5%, over the life of that loan, not only are you getting paid off faster, but you’re saving about $130,000 in interest. And you know, who wouldn’t want that Right?

Alex Okugawa 1:10
So of course, the 15 year will save you more interest over the lifetime of the loan. But of course, that also comes with a higher monthly payment.

Anthony Saffer 1:18
Yeah, and so you have to ensure that you can make that payment more consistently, because it is a bill that that comes up. A lot of times, though, I mean, depending on the rates, and just where things are at the 15 year rate and the 30 year rate tend to converge a little bit. And so especially if they’re close, in that case, I’ve seen a lot of people say, Well, I’m just going to take the 30 year mortgage, because the required payment is lower. And then if I try to pay it off in 15 years, or better, because the interest rate doesn’t doesn’t matter quite as much.

Alex Okugawa 1:46
Yeah you have a lot more flexibility built in within that loan. So yeah, you can make a higher payment. But let’s say something happens, someone loses a job income gets lowered, you have the ability to kind of bring that payment down, give yourself a little bit of breathing room, which for some folks, you know, might be worth paying a little bit higher interest rate on that 30 year.

Anthony Saffer 1:51
Yeah, and if the spreads are wider than you know, and you can save a lot of interest on the 15 year, then maybe you do need to consider it.

Alex Okugawa 2:12
Yeah, now, of course, when we look at this, you know, I know a lot of people, because we’ve been seeing rates come down for quite a while they go, Well, I’ll refinance or I’ll purchase into a specific type of loan, and then you know, later if I change my mind, I can make a change, you know, maybe I can do a no cost refinance, where there’s again, no cost out of my pocket to do this. But then, you know, maybe I’ll get a lower rate, and then I can change my mind. But of course, I want to try and avoid as much as we can that thought process and really be intentional at the start, what we’re looking for and what we’re trying to accomplish.

Anthony Saffer 2:46
Yeah, we’ve been saying for years that it might be the last time we’re able to refinance, right, but rates have stayed low, but we can’t go in with that assumption that rates are going to stay because they are at historic lows. So making those decisions up front is really important and really thinking through, you know, the lifetime of that loan. But there’s a lot, there’s a lot more to think about, you know, because we’re in an environment where rates are at historic lows, we have to say, well, maybe it’s not the best idea to just get the home paid off as fast as possible,

Alex Okugawa 3:15
That’s an opportunity cost.

Anthony Saffer 3:16
What else can I do with the money? Can I invest it at a higher rate of return? Should I be putting more into retirement? Should I be keeping more liquidity in a cash reserve or even intermediate type investments?

Alex Okugawa 3:29
So but another thing too, is like, not only are you investing, you know, putting money away, but you’re also taking advantage, hopefully of, you know, tax efficient retirement accounts at work, you know, stocking money away to get employer matches, you know, those are all benefits that are just beyond putting money away. But also, you know, have two, if not three fold effects of getting tax advantages, extra money from the employer, etc.

Anthony Saffer 3:54
Yeah, I mean, a lot of people do have different opinions on when to pay off a mortgage. Some people believe just carry one as long as you can. I mean, we tend to be more of the opinion that, hey, if you can go into retirement with a home paid off or a mortgage, that’s very manageable, it just adds an element of safety that we saw, especially pay off when economic downturn is severe, like in 2008 people that had their home paid off, it was just a different perspective. Absolutely. So, you know, working towards that, as is a great thing, but it really needs to be decided upon within the context of a full financial plan.

Alex Okugawa 4:27
And this is the kind of stuff that we help folks with. I mean, I think more and more we’re seeing folks come to us and saying, you know, I pay down my mortgage quite a bit retirement is on the horizon. You know what… should I pay off my mortgage now and kind of fast forward that in the next five years? Or do I look at a refinance and a 30 year, maybe make my payments really low? What should I do? I mean, the situations and the circumstances are always so unique. And this is why we say you know, doing a financial plan and really digging into that for you is so critical, because this really digs out, what are we trying to accomplish? What are we shooting for? What is the best for you sometimes it comes down to dollar and cents. Other times it comes down to this just my personal belief, I have to get this done. I’m going to feel better. I’m going to sleep at night if I accomplish XYZ goal. So these are the types of things that we help folks with. If you’re interested in us taking a look at your situation, seeing how we can help visit our website or give us a call. We’d love to talk with you.

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