With today's low interest rates, does it make sense to build equity fast or try to pay off a mortgage?
Is it better to sign for a longer term and then pay additional principal each month? What is the best strategy for building a secure future?
Burning the Mortgage -- An Outdated Goal?
There was a time, not so terribly long ago, when the goal of every homeowner was to have a "burn the mortgage" celebration. But that was when buying a home seemed more like an end goal than home ownership is today. That was also during a time when having the security of a home for old age and future generations was simply "what was done."
Today, owning a home "free and clear," is almost a negative, because it requires cash reserves for taxes and insurance, even though it is possible to borrow against the equity.
Pros and Cons of Short and Long Term Mortgages
Because there are many financing options available, each borrower must assess the situation on individual terms. In general, however, the advantages of a 15-year mortgage are a lower interest rate and, obviously, a faster payoff. The major disadvantage is a higher monthly payment, but if you have sufficient income and other good reasons for wanting to minimize your long-term financial indebtedness, it is certainly an option worth investigating.
On the other hand, even though you will pay a slightly higher interest rate for a 30-year term, you always have the option to pay additional principal, thereby building equity at a faster pace, shortening the term and, perhaps, retiring the note before you retire.
When Do You Plan To Move Again?
In 2013, a study commissioned by the National Association of Home Builders found that the typical American planned to stay in a home for only about 13 years. "Mobility statistics" are somewhat inconclusive at best and may be misleading, but there is no doubt that current generations of home buyers are less attached to their "sticks and bricks" than pervious buyers were.
The U.S. Census Bureau confirms that the average American moves 11.7 times, whether for job reasons or for purposes of "moving up" and "scaling down." More recent statistics point to the average American moving out and moving on every six to nine years.
So, when it comes to choosing a standard 30-year mortgage or a currently-popular 15-year payout, what makes the most sense for today's buyer?
Effect of the Housing Crisis
When interest rates were higher, it was clear that regularly paying additional principal could save a substantial sum of money. At the same time, some of those people who paid off mortgages during the height of their earning years suffered from not having hefty mortgage interest deductions to counteract income tax obligations.
Interestingly, when the housing crisis hit and foreclosures loomed, interest in shorter term mortgages increased because of spreading foreclosure fears. Some of that nervousness still exists in terms of housing commitments; home ownership percentages are currently lower nationally than they have been for almost 50 years, with many young people opting to rent rather than buy.
However, even with interest rates still low, high wage earners appreciate the mortgage interest deduction; it can have a substantial effect on federal and state income tax obligations. Shortening the term of the loan would, in effect, eliminate that tax advantage faster.
Securing Your Financial Future
The bottom line is that you have to assess your own situation thoroughly before making a mortgage decision. There are options other than 15 and 30-year fixed-rate loans and, when it comes to planning your financial future, it is wise to explore all possibilities to make the decision that best meshes with your personal needs and goals. #hw
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