John, a listener of Real Estate Today and a first time homebuyer, called in about last week’s segment, where we discussed the merits of 15 and 30 year mortgages. It sounds to him that getting a 30-year loan is the way to go for flexibility, but that he should try to pay it off in 15 years. He wonders if that’s correct ?

Yes, John, that’s exactly right:

• You can pay off any loan more quickly, which saves interest payments
• If you’ve been making bigger payments than your mortgage requires, there’s no problem with cutting back on those payments if you need to – as long as you’re still making the minimum monthly payment.
• The downside of a 30-year loan is a higher interest rate (one quarter or one-half of a percent, usually). So, if you pay off a 30-year mortgage in 15 years, you’re still paying more in interest than you would have with a 15-year mortgage – but you’ll also have the security of knowing you can drop your payments down significantly if you need to without defaulting on your loan.
• Paying off a long-term loan more quickly also means you’re building more equity
• But remember to build your savings as well as your equity – in an emergency, you have more to think about than just mortgage payments. There’s a balance between building up savings and paying down debt.

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Mortgages