1. Lower monthly payments
Interest rates for long-term mortgages tend to be a bit higher than short-term mortgages because the longer period of time means more risk to the lender. But because payments are spread out across 30 years instead of 15, the amount you need to pay per month is significantly less. Give the longer loan life, this does mean that the total interest amount will be greater than that of a short-term loan. So if you stick with your mortgage loan for its entirety, you will be paying more overall.
That being said, you always have the options of refinancing your loan down the line for a short-term loan with a lower interest rate. And at the end of the day, even after your mortgage is completely paid off, you will always have other monthly expenses (insurance, credit card payments, property taxes). Ensuring your monthly mortgage payments are low helps with you pay for your other expenses and build up good credit while doing so.
2. More financial flexibility
The longer time-frame allows you to retain more control over how you save or spend your money. With a 15-year mortgage, you have to pay it off within 15-years. And considering the higher monthly payments and larger down payment required, that’s not always a certainty. With a 30-year mortgage, you can pay it off within 30-years, making the most of your lower monthly mortgage payments, or you can pay a higher monthly amount (when you can afford it) and pay off the loan earlier.
3. Greater liquidity
A long-term mortgage lets you invest in other assets that you can tap into in case of emergency. As the 2008 housing crisis illustrated, investing solely in your primary residence is a liability.
Unless you live on a refurbished estate that supports agriculture and hospitality services (like Dick and Angel’s home on Escape to the Chateau), your primary residence is not really an asset. And unless you are in the business of flipping homes, you never really need to worry about paying off the entire mortgage. The fluctuation in property value will happen whether you’ve paid off your mortgage or not. So if you plan to live on the property for the foreseeable future, there’s no reason to get a short-term mortgage and commit to higher monthly payments.
4. It’s tax-deductible
Assuming you itemize your taxes, the interest on your mortgage loan is tax-deductible up to $750,000. Because the deduction is taken at your top tax bracket, the higher your tax bracket, the more your mortgage interest could save you in federal and state income taxes. If you live in a high-tax state (like California), the tax-deduction could be a big help and lower your monthly expenses even further. It also means that the higher interest rate of long-term mortgages could be a plus instead of a caveat.
Check your post tax-deduction mortgage rate to determine your real long-term mortgage costs.
Hopefully this post has dispelled some of the misplaced anxieties surrounding long-term loans. Life is complex. And whether or not you can quickly pay off a mortgage doesn’t necessarily simplify things. Weigh your options and pick what works best for your situation. You may find that the more efficient option for your particular needs is in fact to carry a long-term mortgage.
