I'm buying at 65: 15-year or 30-year mortgage?
February 27, 2014
Q: I am 65 and divorced. I am thinking of buying a townhouse as a first-time buyer. Should I go for a 15-year or a 30-year mortgage? I am going to buy something around $200,000 and put 50 percent down.
A: You are in an enviable financial position of having some flexibility in how you approach this purchase. The best way to use that flexibility depends on today's market conditions and your particular situation.
As for the market conditions, two features of today's factors stand out as relevant to your situation:
- The gap between current mortgage rates and deposit rates is unusually wide. This means you face paying much more interest on your mortgage than you could earn on your money in savings accounts, money market accounts or CDs. If this gap were smaller, it would argue for a slower repayment schedule (i.e., a longer mortgage and a smaller down payment) because the effective cost of borrowing would be low, especially when the tax deductibility of mortgage interest is considered. However, with the gap between mortgage and deposit rates relatively wide, it argues for a shorter repayment period.
- The gap between 15-year and 30-year mortgage rates is unusually wide. At current mortgage rates, there is nearly a full percentage point difference between the two. This means that 15-year rates represent an unusually large discount relative to 30-year rates.
In short, both of these conditions argue for a shorter mortgage, if your situation can support that.
Speaking of your situation, the key factors here are cash flow and savings, because your plan would put demands on both if you opted for the 15-year mortgage.
Before you make the 50 percent down payment you are contemplating, make sure you are not cleaning out your savings account by doing this. You will need to keep some cash in reserve -- owning a home generally means encountering a series of unexpected expenses, plus you are approaching retirement age.
As for cash flow, before you take on the larger monthly payments that would come with a 15-year mortgage, be sure you have the regular income or other resources to readily meet these payments. Do not stretch your budget so thinly that you would be at risk of missing a payment.
Fifteen-year mortgage rates offer lower interest rates than 30-year mortgages, but the monthly payments are significantly larger because the repayment period is half as long. For most home buyers, this eliminates a 15-year mortgage from consideration, but in your case, your large down payment should mitigate the impact of a shorter repayment period, sharply reducing the principal of the loan.
Either way you go, it sounds like you have the resources to afford this purchase comfortably -- so enjoy the townhouse!
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