Mortgage Customization Options
December 28th, 2011
Tips for making your mortgage fit into your long-term financial plan.
For most people, a home mortgage represents their biggest financial commitment, in terms of both theamount of money involved and the length of time they will make payments. Therefore, home mortgages are a major component of long-term financial planning for many individuals and families.
Fortunately, there are creative options available that may enable you to customize your mortgage to match your long-term financial goals. These primarily include variations in the length of the mortgage term – or in other words, how long payments must be made before you own your home free and clear.
The traditional home mortgage is paid over a period of 30 years at a fixed rate of interest. But because it’s rare nowadays for an individual or family to actually live in a home for this long, banks have created mortgages with shorter terms to provide homeowners with more flexibility and the opportunity to build up equity in their homes faster.
With a 15-year mortgage, you can own a home in half the time it would take with a traditional 30-year mortgage. However, the monthly payment on a 15-year mortgage will be considerably higher than the monthly payment on a 30-year mortgage, though not twice as high, because the amount of interest paid over the life of a 15-year mortgage is considerably less than that paid on a 30-year mortgage.
For example, the monthly principal and interest payment on a 30-year, $250,000 mortgage with a 6 percent fixed interest rate would be $1,499. Switching to a 15-year mortgage on the same amount at the same interest rate would raise the monthly principal and interest payment to $2,110, or an additional $611. But paying off the mortgage in half the time would reduce the amount of interest paid over the life of the mortgage by $159,859. Mortgages with 10- and 20-year terms may also be available.
Whether or not it makes sense for you to choose a shorter-term mortgage as part of your long-term financial plan depends on several factors:
- If you can afford the higher monthly payment
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How long you plan to stay in the house
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Your age, when you plan to retire, and your projected retirement income and expenses
If you can afford the higher monthly payments without undue stress and strain on your budget, some experts say that choosing a shorter-term mortgage is a smart move. Doing so provides a guaranteed “return” on your money that’s equivalent to your mortgage interest rate (not factoring in potential deductions for mortgage interest).
However, other experts counter that more money could be earned over the long term by investing the difference between short- and long-term monthly mortgage payments – or in the case of our example with the 15-year mortgage, $611 per month. They point out that the stock market has historically earned higher returns over the long term than the current low mortgage interest rates.
Meanwhile, if you plan to stay in a home for the long term (at least 10-15 years), many experts advise opting for a shorter-term mortgage. This is where factors such as your age, planned retirement date, and retirement income and expenses come into the equation.
For example, suppose you’re 45 years old, plan to stay in the home for the long term and want to retire at age 65 with minimal living expenses. By opting for a 15- or 20-year mortgage, you could own your home free and clear when you retire, which would eliminate what is probably your biggest monthly expense.
Of course, every situation is unique. We can work with you to help you determine the best mortgage options and strategy for your long-term financial goals. Contact one of our mortgage experts – Martin O’Sullivan or Shaun Spada for guidance.
