Have you ever noticed that trying to save money can end up costing you more?
Over the weekend, a friend was telling me how her twenty-something sister bought a new home and took out a 15-year fixed term mortgage.
Looking at the numbers, a 15-year mortgage can be a smart move. Not only does a 15-year mortgage normally offer lower interest rates than a traditional 30-year mortgage, but paying off the debt faster saves you thousands in interest costs over the course of the loan. In fact, I refinanced from a 30-year to a 15-year mortgage a few years ago.
But don’t forget that paying down the loan twice as fast makes the monthly payments much higher, and that’s where people can get themselves into trouble.
Common sense versus dollars-and cents
Making personal finance decisions based on just dollars and cents, instead of common sense, can make a good idea turn bad real quick.
That’s why I caution clients to tread warily when opting for a 15-year mortgage. Far too often, the accelerated payment schedule can back the homeowner into a corner. All it takes is one thing to go wrong (a medical emergency, a job loss, or some other major expense) and the homeowner starts struggling to make the hefty monthly mortgage payment.
Before making any financial decision, it’s always good to ask yourself what can go wrong, assume something will go wrong, and make sure you can still make ends meet.
Biting off more than you can chew
Trying to save money on your mortgage – by opting for a too aggressive repayment schedule – can backfire big time. It’s the financial equivalent of “biting off more than you can chew” and can push you into incurring even costlier credit card debt, or God forbid, losing your home if you’re unable to make payments.
Here’s a better solution.
If you are younger, short on cash, or have uncertain cash flow, stick with the 30-year mortgage. Want to pay down your mortgage faster? You’re free to do so. Just add some extra principal to your monthly payment. There’s no cost, and you still have the freedom to pay more or less depending on the monthly budget.
On the other hand, opting for the 15-year mortgage can be a fantastic money saver if you’re older, have stable income, and deep pockets permitting you to keep paying on schedule even after a job loss or other catastrophe.
Saving money is great, but smart decision-making is even better.