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Is a longer mortgage better when rates are rising?

Q: I was considering a 15-year mortgage loan to get the lower rate, but now that mortgage rates are rising, I'm thinking a 30-year mortgage would be best. My thought is that the longer you lock in a mortgage rate at low levels, the longer you benefit from below-market rates. What do you think?

A: It depends somewhat on what you intend to do with the extra money you'd have on hand by making lower monthly payments on a longer-term loan. If there is a possibility that you might need that money in a few years, whether for home improvements or even anything unrelated to your house, then you would be better off taking out a longer-term mortgage initially. The idea is that by retaining more liquidity, you might avoid borrowing (or avoid having to borrow as much) in the future when interest rates could be higher.

On the other hand, if you don't anticipate needing the liquidity, the question you have to ask yourself is whether you feel you can invest the excess cash profitably enough to make up for paying more interest with a longer-term loan. Given that deposit rates are near zero these days, you are unlikely to come out ahead putting the extra money into savings -- unless you anticipate that interest rates are going to rise by several percentage points in a relatively short period of time, allowing them to get ahead of the mortgage rate you've locked in.

A key thing to pay attention to is the spread between 30-year and 15-year mortgage rates. As mortgage rates have risen over the past six months, this spread has gotten a little wider. The wider that spread gets, the stronger a case you could make for the shorter-term loan.

Of course, whether you go with a 15-year or a 30-year mortgage loan, the most important part of your plan is locking in today's mortgage rates while they are still among the lowest in history.

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