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Should I go for a 15-year or 30-year mortgage?

October 04, 2011

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

30-year mortgage

Q: My wife and I have been saving a down payment for our first house. We have enough now to afford a 30-year mortgage, but I'm tempted by how cheap 15-year mortgage rates are. I'm thinking that if we wait a little longer and put together more of a down payment, we can knock the loan amount down to where we can afford a 15-year mortgage. What are the pros and cons of waiting to do that?

A: Well, first of all, your approach is admirable. People who have such a strong commitment to saving before spending show the kind of discipline that will help them follow through on a long-term commitment like a mortgage. In fact, just the process of saving for a down payment is a good dress rehearsal for coming up with the extra money you'll need every month to make your mortgage payments.

So, if a little saving is good, more must be better, right? Well, to some degree it is. A larger down payment would give you more of an equity cushion in your home. Also, in terms of your plans of working towards a 15-year mortgage, those rates are certainly tempting. Based on current mortgage rates, 15-year rates are 0.80 percent cheaper than 30-year rates.

Still, there is one more aspect of mortgage rates that you have to take into account: they are unusually cheap at the moment. In fact, 30-year mortgage rates today are lower than 15-year rates were at the start of the year. So, if you have a down payment ready, you might be better off making sure you don't miss this opportunity. Current mortgage rates show no signs of reversing course, but such reversals can be unpredictable and sudden. Bottom line: if you can comfortably afford 30-year terms, you might want to lock them in while rates are at record lows.

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