Why take 15 when you can have 30?

Hear me out before you protest, but taking a 30-year loan is the smartest thing you can do in today’s interest rate environment.

Lots of folks are wanting to talk about refinancing to 15-year loans these days, what with interest rates being available below 4%. Traditional thinking says “pay off your house as fast as you can”. But is that really the smartest thing to do?

Acclaimed financial advisor Ric Edelman would tell you NO! He’s an advocate of taking the biggest mortgage you can afford for the longest possible term. Chances are he didn’t really like the 40-year term that used to be available, because those were a big rip-off, but he loves 30-year terms.

Consider a loan of $200,000. If you took a 15-year note at 3.875%, you’re paying about $1466 per month. The same loan over 30-years at 4.375% costs $998 per month. That’s a difference of $468, and the 30-year rate is still really low.

Granted, a 15-year loan amortizes much more quickly than a 30-year, which can be great if you want to build equity in a hurry. But then you’re losing the use of that $468 per month difference. Once you put your money into your house, you can’t have it back.

Well, okay, you can, but you have to qualify for a new loan, get a new appraisal, and pay new closing costs at the new market rate. Seems to me most folks ask about a cash-out refi when they’ve had an emergency because of illness or job loss or massive credit card debt – so they can’t qualify for the new loan. Had they put $468 a month into a savings account instead of pre-paying their mortgage, that’s $5,616 per year they could tap as cash. No qualifying, no fees, no waiting.

The other thing you’re giving up is your income tax write-off. The home mortgage deduction is probably the largest deduction for most families, and when you’re on a shorter-term loan paying less interest, you get less write-off – and by a significant amount.

And, if you borrow lots of money at today’s low rates, you’d be emulating some of the largest corporations in the nation. Check the business news to learn about how these companies have loads of cash on hand, yet are still choosing to borrow money using today’s crazy-cheap leverage.

Do the math for yourself, but in terms of liquidity, tax write-off, and leverage, taking a longer-term loan can be a much smarter move today. And if that makes you all itchy, when your savings account grows as large as the loan balance, you could still pay off your loan in full then.

Tammy Engel is your local Mortgage Advisor, and is the only lender in Kern County authorized to display the Lending Integrity Seal of Approval. Reach her at 661/822-REAL with your home loan questions.