3 Steps to Deciding a 30- vs. 15-Year Mortgage

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BOSTON (TheStreet) -- Today's record-low mortgage rates are giving consumers the choice of two great options -- 30-year mortgages that charge just over 4% interest or 15-year loans with rates nearly down to 3%.

"You really can't go wrong," says Greg McBride, senior financial analyst at interest-rate tracker Bankrate.com RATE "Rates are at record lows on both products."
Thirty-year or 15-year mortgage? The right answer will depend on your circumstances, but some factors can held decide which way to go.

Bankrate.com's latest weekly survey shows that average U.S. rates fell to 4.05% as of this week for 30-year fixed-rate mortgages, and 3.25% for 15-year fixed loans.

Both are all-time lows, which pretty much means the only thing cost-conscious homebuyers and refinancers need to decide is which type of loan to get.

Should you lock in the best 30-year rate in history and enjoy its benefits for three decades or grab a 15-year mortgage's rock-bottom rate but pay the money back twice as fast?

McBride says there's no single answer that covers every consumer's individual situation.

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"The right answer will depend on your personal circumstances," he says. "That's why they call it personal finance."

Here's a look at some factors borrowers should consider in deciding which way to go:

Affordability
"The first thing to look at is the difference in monthly payments between a 15-year mortgage and a 30-year loan of the same size," McBride says. "You want to look at what that 15-year payment will be and decide if you can swing it. If you can't, that will decide it."

Fifteen-year mortgages do charge lower interest rates than 30-year loans -- but carry higher monthly payments because you have to pay all principal back in half the time.

For example, borrowing $300,000 for 15 years at this week's 3.25% average rate means you'll have a $2,108 monthly mortgage payment (excluding the effect of any origination fees).

That's nearly 50% higher than the $1,441 you'd pay if you take out the same-sized loan for 30 years at today's 4.05% average rate (again, ignoring origination fees).

Not everyone can afford such higher payments -- or convince the lender reviewing a mortgage application to "greenlight" such a loan.

You can check out your potential monthly payments by plugging in specifics from your own situation into TheStreet's mortgage calculator.

Your overall finances
Using a 15-year mortgage to pay off your home definitely saves money, but means you'll have less cash each month for other financial goals that many people now skip.

For instance, McBride says less than one U.S. household in four has built up a six-month emergency supply of cash that experts recommend for emergencies. Even fewer are maxing out contributions to tax-advantaged retirement accounts such as 401(k)s, he says.

"There are lots of people with sufficient cash flow to support a 15-year mortgage who really ought to have higher personal-finance priorities than pouring extra money into their homes each month," McBride says.

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The expert recommends taking a pass on a 15-year loan if getting one means not having enough money to max out contributions to your 401(k), individual retirement account and/or 529 college-savings plan.

You'll also want to make sure you pay off high-interest credit cards and have at least six months of emergency savings set aside before going for the shorter-term mortgage, he says.

Your age and job situation
Consumers who think they can afford a 15-year loan's higher monthly payments must take a realistic look at how much job security they have.

Sure, you might qualify for a 15-year mortgage today. But if you lose your job later and can't make the payments, you won't have enough income to qualify for refinancing into a 30-year loan's lower monthly bills.

"You have to consider how stable your income is," McBride says. "It's one thing to be able to swing a 15-year mortgage's payment now, but are you in a profession or a position where your paycheck is steady enough that you're going to be able to make those payments month in and month out?"

Fifty-somethings should also weigh the pros and cons of paying off a mortgage in 15 years vs. taking out a 30-year loan that they'll still have to cover during retirement. Having a 15-year loan could mean knocking out your monthly mortgage payment right around the time you retire, but choosing a 30-year loan could mean more money to put into 401(s) and IRAs while you're still working -- plus a great mortgage-interest tax deduction once you've retired.

"People who are in line for a big pension and Social Security check and have plenty of retirement assets will have lots of cash flow in retirement," McBride says. "What they won't have enough of are tax deductions."

A middle course
Still unsure which way to go?

McBride suggests a third option -- taking out a 30-year mortgage and adding extra money in your monthly payment whenever you can afford to do so.

Most mortgages allow you to include such additional principal payments at any time with no prepayment penalties.

True, you'll have to pay a 30-year loan's higher interest rate -- but sending extra money whenever it's convenient will shorten the mortgage's term without firmly committing to a 15-year loan's heftier payments.

"You get the flexibility to pay ahead or not depending on your financial circumstances at any given time," McBride says.

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