Many people think that having a 15 year mortgage will always be better than a 30 year mortgage. Sometimes it may be, and sometimes it may not be.
There actually are financial experts out there who argue that one should have a big mortgage and pay it over a long period of time, in some circumstances:
It is well-documented that 30-year mortgage rates have been near the lowest levels ever recorded.
#1 The Mortgage Doesn’t Affect Value of the Home
People buy houses generally with the idea that it will grow in value over the years. But the increase in value over time has nothing to do with the mortgage that is carried on the property. So, you should feel fine having a lower mortgage payment as the value of the asset is not affected. Of course even with thirty year mortgages, you can always pay extra and pay off the entire balance due at any time.
Some argue that owning your home in full is sort of like having $300,000 buried in your backyard. The value of the home will, generally, increase over the years whether you have a mortgage or not. Any equity that is in the home is getting no interest. You probably wouldn’t dig a hole in the back yard and stick $300,000 in it right?
So why have $300,000 sitting there in your living room?
#2 A Mortgage Doesn’t Prevent Building Equity
We all want equity in our homes. You can use the money to pay for college, start a business and even tap it for retirement. The conventional wisdom is that mortgages are bad; the bigger your loan, the lower your equity. Some argue that this is wrong. Building equity in your home is not just by paying your mortgage. For most homeowners, over time, the home will grow in value. If the house increases in value at just 3% on average, which is low balling it over a decade or longer, your home will be worth $100,000 more or even much more.
You could have hundreds of thousands in equity even if the loan balance does not decline at all over 20 years!
#3 A Mortgage Is the Cheapest Loan You Can Ever Get
You will never be able to borrow 4% or cheaper money on anything over the long term other than with real estate. Yeah, you might be able to get a zero percent interest credit card, but not for more than a year. Then the interest rate goes up to 15% or more.
#4 You Can Tax Deduct Mortgage Interest, and Having Mortgage Interest is Tax Favorable
Any interest you pay on a mortgage loan can be tax deducted up to $1 million. The deduction you enjoy is at whatever your top tax bracket is. So, if you are in the 35% bracket, every buck you pay in mortgage interest will save you .35 in federal income taxes.
If you’re in the 33% tax bracket and you have a 5% mortgage loan, you are paying 3.35% after taxes. And if you were able to invest money and make 5%, your profits only are taxed at 20%. So your after tax profit would b 4%. You are still making a profit, even if your investments earn no more than what you pay for your mortgage.
Several banks and lending companies recently announced affordable no money down mortgage programs with competitive 30-year rates.
#5 Paying the Mortgage Gets Easier
For most people, paying the mortgage gets easier over time as your income increases. You are paying the same amount of money to the bank now that you did 10 years ago, but your income may have gone up 25% or much more. This is especially true on a 30 year mortgage as you are paying much less per month than a 15 year loan payment.
#6 Cash Out Refinance As Soon As You Can To Protect Equity
One of the greatest things about carrying a long mortgage is that your home’s value rises over time. But you don’t have to sell your home to tap the equity. Keeping the equity in the home can actually be a risk because after all, it’s only money on paper. If the market tanks, your equity goes up in smoke.
The smart thing to do is to pull the equity out of the home with cash out refinancing! You then should take your equity and invest it into something that you are sure is going to pay you more in interest each year than you are paying on the loan. There are plenty of solid real estate investments out there that can pay you 10% per year, if you invest wisely. And you might be paying 4-5% on your loan, so you can easily make 5% per year.
#7 The Thirty Year Mortgage Lets You Invest More Money
If you buy a house all cash or pay off the loan in 15 years, you are putting more money into the house you live in. Yes, you will not be paying a mortgage faster. But if you were to put down only 10% on a 30 year loan, you will be eating up less of your available capital that is being plowed into the house you live in. You could take that money and put it into an investment property and make 10% interest or more.
#8 You’ll Always Have to Make Payments Anyway
Even if you pay off your loan in 15 years, you always will be making payments. A house always requires repairs and maintenance. You always will be paying property taxes and insurance as well, which can add up to thousands per year. There are pluses and minuses to having a 30 year mortgage and a 15 year mortgage. A lot of it comes down to what you intend to do with the money that you are saving by paying a longer mortgage over 30 years.
If you spend the extra money on cars and other things that are depreciating assets, you aren’t taken advantage of paying a lower mortgage over time. But if you plow that money into high paying investments, paying a lower mortgage over 30 years can be preferable.