Since the housing bust, regulators have focused on preventing borrowers from entering into potentially toxic loans. To help accomplish this, the U.S. government established the Consumer Financial Protection Bureau (CFPB) in 2010. As part of this effort, the CFPB has proposed new disclosure forms to help borrowers understand the real risks and costs associated with their mortgage. But many potential borrowers are still unsure about the type of mortgage that is right for them. Many borrowers may be attracted to 15-year mortgages, which have a shorter term and lower interest rates than 30-year mortgages. But such a mortgage may not be right for their needs.
1. Can you afford to pay off the mortgage in 15 years?
If you can afford the higher payments associated with the shorter-term 15-year mortgage, there is no reason not to take one.
2. Are you buying your first home?
A longer-term mortgage can make a more expensive home more affordable for a new buyer.
3. Are you looking to refinance?
If you already have a mortgage and would like to refinance, now may be a good time. Cecala noted that if your current payments on a 30-year mortgage are high enough, you might be able to refinance into a 15-year mortgage and make similar monthly payments while shortening your mortgage term.
4. Are you planning on retiring soon?
Typically, borrowers who take 15-year mortgages are at least 40 years old. These borrowers are often willing to pay off the balance on their mortgages faster in order to retire with little or no outstanding debt on their homes.
5. Do you have a strict savings plan?
Choosing a 15-year mortgage over a 30-year mortgage also may be a worthwhile choice if you are not a disciplined saver. But many people need that extra money for something else, so they choose to keep their money in a 30-year mortgage with lower individual monthly payments.