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Choosing the Right Mortgage

MoneyWise

Christian talk radio with Rob West

February 28, 2022

If you’re buying a home, should you take out a 15-year mortgage or a 30-year mortgage? Both options have their advantages and disadvantages, but is there another option you haven’t considered? We’ll discuss that today on MoneyWise. 15 or 30? Arecent articleon the personal finance site Measure Twice Money gives the pros and cons of 15 vs. 30-year mortgages. It’s a debate that’s been raging for years. The 15-year mortgage is paid off quicker and saves tons of interest. The 30-year is budget friendly but costs much more in the long run. So if the money’s in the budget, homebuyers often opt for the shorter-term mortgage. Crunch the numbers and you’ll see why. BENEFITS AND DRAWBACKS OF BOTH A 30-year loan for $300,000 at 3.5% interest and a monthly payment of $1,350 means you pay $185,000 in total interest over the life of the loan. Your monthly payment is significantly lower than with a 15-year loan, but you’re paying for that benefit big time over the years. If you choose the 15-year mortgage, the same loan at 3.5% interest would have a monthly payment of $2,150. That’s $700 more a month than the 30-year loan. But the total interest paid over the term of the mortgage would be only $86,000. That’s a huge reduction of $99,000 in total interest. No wonder people opt for the 15 if they can handle the payments. Now, I know what you’re thinking the interest rate wouldn’t be 3.5% with a 15-year mortgage. The rate would be lower than the 30-year mortgage. And you’re right. So let’s do the math again. With a 15-year, $300,000 loan at 3.0% interest, your monthly payment would be $2,070, and the total interest paid over the term of the mortgage would be only $73,000. That’s even more of an argument for the 15-year loan. So the 15-year loan is great, but it does carry more risk than the 30-year. You’re assuming you won’t have a serious financial setback that prevents you from making those higher monthly payments. A 30-year note has risk also, but not as much. You also pay a ton of extra interest for that reduction in risk. But before you decide between them, consider a third option! THE HYBRID APPROACH That third option is the hybrid approach. The concept is simple: Get a 30-year mortgage, then pay it off like it’s a 15-year loan. The 15-year mortgage has a lower interest rate and the 30-year mortgage has a lower monthly payment, but treating the 30 like a 15 gives you tremendous cash flow flexibility. There’s a cost to this hybrid plan. If you go with the 30-year mortgage but pay it off exactly like a 15-year loan, your monthly payment would be a bit higher because the interest rate on a 30-year loan will likely be higher than a 15-year loan. However, that cashflow flexibility can be a huge help when the unexpected strikes. The COVID pandemic has revealed in no uncertain terms that we cannot predict the future. Of course, this hybrid approach isn’t for everybody. You may have already saved up the recommended 3 to 6 months’ living expenses in your emergency fund. You may have greater than normal job security. For you, a straight 15-year mortgage might make more sense. You would save money with a lower interest rate. But if you’re in doubt, consider playing it safe and going with the 30-year mortgage. You can always make extra payments each month. Just be sure to designate that the extra money goes toward the principal of the loan. LISTENER QUESTIONS On today’s program, Rob also answers listener questions: ●How can you freeze your credit to protect against fraud? ●How does employment income impact social security income? ●What are fixed annuities and are they good investments? ●What are the best investment options for a retiree after cashing in a CD? ●Is there a particular age at which you no longer have to pay taxes? ●Are pension and 401k withdrawals always taxable? RESOURCES MENTIONED ●Find a Certified Kingdom Advisor ●Sound Mind Investing

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