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By G. Steven Bray
Very low interest rates have many people refinancing their 30y mortgages into 15y mortgages. The question is is this a good decision?
The argument in favor of the 15y mortgage is that it allows you to build up equity more quickly. For example, for a $250k mortgage, you would lower your principal balance by over $70k at the end of 5 years if you used a 15y loan. In that same period, you would have built only about $24k of equity with a 30y loan.
But is that equity beneficial? Do you risk being house rich and cash poor?
Let’s continue the example. The principal and interest payment on a $250k 30y loan today would be $1194. For a 15y loan, the payment would be $1757, or $563 more each month. Money is cheap right now. Could you gain greater benefit by investing that $6756 each year in a retirement account?
A further consideration is that mortgage interest currently is tax deductible. During the first year, you’d pay $9920 in interest on the 30y mortgage and only $7930 on the 15y mortgage. The 30y mortgage will provide a larger deduction and one that will last longer into the future. Thus, depending on your tax situation, the IRS may refund you some of that extra interest you paid.
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