Getting your own home can be an exciting thing, or an intimidating one. The commonly asked question in all of this, is “Do I sign up for a 15-year-mortgage or a 30-year-mortgage?” The answer is simple, it depends. There are many scenarios out there that can justify why a 15 year may be better than a 30 year and vice versa. If the goal in mind is to build wealth, than a 30-year-mortgage is the way you want to go. Where the 15-year-mortgage comes with typically lower interest rates, the cost of inflation and the saving from tax breaks on interest can be appealing and worth the extra years paying a mortgage. The goals of the investor are important. If the goal is to create the largest amount of wealth of the years, than the 30-year-mortgage has much to offer.
The 15 year debt free path is not for everyone. It is assumed it will generate more profits, but that is not always the case. Of course the 15-year offers a quicker debt free path. In the long run, much less interest is paid, and the home comes with a debt free path. Inflation comes into question with this method. It is safe to assume inflation will bring property values and rent prices up about 3.4% per year. As the loan begins to get paid down, the home owners leverage increases. Keep in mind, this home has been bought as an investment, whether the owner chooses to live in the home longer or not. Leverage is how much is owed on the property, and thus increases the property value. The quicker you pay down the mortgage, the less leverage available and the less money you property becomes worth. The slower process of going through the 30 year mortgage increases property value. This is assuming the tax on the mortgage is not over 5%. To add onto this, the extra cash flow of the individual with the 30 year mortgage is capable of being invested elsewhere. The 30 year investor has the capability to invest their cash flow elsewhere over the 15 year investor who has a higher mortgage and does not have the same cash flow. 30 year investors tend to have more net worth than a 15 year. All of this comes with the possibilities with the 30 year, and in assuming the investor puts his/her money into cash flow investments.
Examining goals is important. This method might not be for everyone. Some choose to buy houses with the intention of selling them immediately. When this is the case, a cash purchase is deemed the best method of going about this, so he/she can avoid interest on the payment. The average American does not even have $1,000 in their savings account. The extra amount of money allows for more investments, is offers a level of security one with a 15-year loan does not have. The downside, is having to wait for the home to truly be yours. The decision is one that can be changed to refinance, but it is important to have a sit down and recognize your goals.