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When you borrow to buy a home, you need to determine the loan repayment schedule. The choice is yours, with most lenders offering loans with terms of 15 to 30 years.
Loans with longer repayment terms usually have higher interest rates and cost more over time, but there are still reasons why you may want to opt for a longer repayment period.
Here are four.
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1. You will have lower monthly payments
The longer the repayment period of your loan, the lower your monthly payment. This is because you will be making more of these payments over time so that each can be lower, and you will always pay back your principal and interest on time.
Of course, the flip side is that the longer you lengthen your payment period, the more time you’ll have to spend on making payments instead of doing other things with your money. And by paying interest longer, you’ll end up with higher total costs.
It helps to find a balance. For many people, the 30-year mortgage provides a reasonable monthly payment without stretching payments so long that you are hardly ever mortgage free. The 15-year-old, on the other hand, comes with monthly payments that can be quite high, making it difficult to qualify for a loan or fit them into your budget.
2. You will have more flexibility in knowing what to do with your money.
When you avoid committing to a mortgage with a short repayment time and a high monthly payment, you’re not tying up a ton of money every month on housing costs. You can use the money saved by choosing a 30-year loan instead of a 15-year loan to do other things like saving for emergencies or for retirement.
3. You can benefit from the interest deduction longer
If you itemize your taxes, you have the option of deducting mortgage interest on home loans up to $ 750,000. If you pay off your mortgage in just 15 years, you’ll lose that deduction half as much as if you had a 30-year loan.
The mortgage interest deduction subsidizes the cost of homeownership. Your net income does not decrease as much when you pay mortgage interest since you pay your interest with pre-tax dollars and thus reduce your tax bill.
The savings from deducting interest can be significant, depending on your tax bracket.
4. You always have the option of repaying the loan early
One of the great advantages of a loan with a shorter repayment term is that you get rid of your debt sooner. But if you choose a 30-year loan instead of a 15-year loan, there’s nothing stopping you from making additional payments if you want to pay off your loan sooner than expected.
You have the option to do this anytime you want and can afford to do it. You just don’t have to, which can add financial pressure.
For all of these reasons, a 30-year mortgage may be a better bet than a 15-year loan. However, you will need to consider your mortgage payment amount as well as your individual financial goals when deciding which loan repayment schedule is best for you.
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