| After you've decided which
type of mortgage -- fixed or adjustable -- you want, you may think that your mortgage
quandaries are behind you. Unfortunately, they're not. You also need to make another
important choice -- typically between a 15-year and a 30-year mortgage. (Not all mortgages
come in just 15- and 30-year varieties. You may run across some 20- and 40-year versions,
but that won't change the issues we're about to tackle.) If you're stretching to buy the home that you want, the choice of how
long-term your mortgage will be may very well not be yours to make. You may be forced (we
should say forcing yourself, because you choose what home to buy) to take
the longer-term, 30-year mortgage. Doing so isn't necessarily bad and, in fact, has
advantages.
The main advantage that a 30-year mortgage has over
its 15-year peer is that it has lower monthly payments that free up more of your monthly
income for other purposes, such as saving for other important financial goals (such as
retirement). You may want to have more money so that you aren't a financial prisoner to
your home and can just have a life! A 30-year mortgage has lower monthly payments because
you have a longer time period to repay it (which translates into more payments). A
fixed-rate 30-year mortgage with an interest rate of 7 percent, for example, has payments
that are approximately 25 percent lower than those on a comparable 15-year mortgage.
What if you can afford the higher payments that a
15-year mortgage requires? Should you take it? Not necessarily. What if, instead of making
large payments on the 15-year mortgage, you make smaller payments on a 30-year mortgage
and put that extra money to productive use?
If you do, indeed, make productive use of that extra
money, then the 30-year mortgage may be for you. A terrific potential use for that extra
dough is to contribute it to a tax-deductible retirement account that you have access to.
Contributions that you add to employer-based 401(k) and 403(b) plans (and self-employed
SEP-IRAs or Keoghs) not only give you an immediate reduction in taxes but also enable your
money to compound, tax-deferred, over the years ahead. Everyone with employment income may
also contribute to an Individual Retirement Account (IRA). Your IRA contributions may not
be immediately tax-deductible if your (or your spouse's) employer offers a retirement
account or pension plan.
If you have exhausted your options for contributing
to all the retirement accounts that you can, and if you find it challenging to save money
anyway, the 15-year mortgage may offer you a good forced-savings program.
If you elect to take a 30-year mortgage, you retain
the flexibility to pay it off faster if you so choose. (Just be sure to avoid those
mortgages that have a prepayment penalty.) Constraining yourself with the 15-year
mortgage's higher monthly payments does carry a risk. If you fall on tough financial
times, you may not be able to meet the required mortgage payments.
This Homebuyers Tip was excerpted
from
Home Buying For Dummies, by Eric Tyson, Ray Brown.
© 1997 by Eric Tyson, Ray Brown, used by permission of IDG Books.
ISBN#: 1568843852
Complete our
brief questionnaire, and we will send you
our Houston relocation package, and any other information that you are needing about
Houston real estate.
|
