Should I take advantage of 15-year mortgage rates?

Posted by  on Jul 09, 2012

Q: I'm trying to decide between a 30-year and a 15-year mortgage. Those 15-year mortgage rates look awfully tempting, but the two arguments people keep making against are that I'll have better cash flow with the lower payments on a 30-year, and that a longer mortgage lets me take advantage of the interest deduction for twice as many years.

A: As exciting as it's been to see 30-year mortgage rates drop below 4 percent, it is perhaps even more remarkable that by mid-2012, 15-year mortgages were below 3 percent. So it's no surprise that you find 15-year mortgage rates tempting.

Of the two arguments you mention for not taking advantage of those 15-year rates, the cash flow argument is the more worthwhile. While interest deductions can help defray your mortgage costs, but the fact is that you'd be better off if you could simply eliminate some of that cost. Between the lower interest rate and shorter term of a 15-year mortgage, you'd save more even after the tax deduction.

Turning to the cash flow argument, this may be an important issue. It is never wise to take on a mortgage that stretches your cash flow to the breaking point, because unexpected expenses are almost inevitable when you are a homeowner. However, if you have a good reserve of savings, and/or a reliable income that meets your monthly obligations with ease, then cash flow isn't really an issue and you can opt for the greater overall savings of a shorter mortgage.

By the way, the people who should most consider a 15-year mortgage are those who are refinancing. Not only is it an opportunity to get an even lower interest rate, but if they've already paid down some principal, it should mean less of a jump in monthly payment. After a few years of making payments, why restart the mortgage clock at 30 years? Shortening that clock to 15 years when refinancing can make a lot of sense.


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