Now that you’ve got enough money saved to say goodbye to the renter life, you need to decide which mortgage is best for you. It’s an important decision because one type of home loan will save you thousands of dollars in the long run, while another will keep more money in your wallet on a monthly basis.
The 15-Year Mortgage
The first obvious plus with a 15-year mortgage is that you will pay your house off faster. But the other benefit is that a shorter mortgage gets you a far better interest rate, saving you tens of thousands of dollars over the life of the loan.
The drawback is that your monthly mortgage payment will be higher, which means less money for discretionary spending as well as for saving.
The 30-Year Mortgage
This is the route Santa Monica-based financial consultant Jason Kirsch recommends his millennial clients take.
“Minimize your mortgage payment and use that money to improve your life and develop yourself,” says. “An investment in yourself when you’re younger will pay more dividends than an investment in yourself when you older.”
Investing in yourself might mean furthering your education, getting certified in yoga so you can teach classes, or starting a side business. Kirsch even considers joining a gym or club an investment because it promotes health and networking.
Financial consultant David Rosell, author of the book “Keep Climbing – A Millennial’s Guide to Financial Planning,” says a 30-year loan also makes sense if you plan on living in your home for seven years or less.
“You’ll profit from the lower monthly payments, and you won’t have to pay as much interest because you’ll be selling your home long before your loan’s payoff date.”
A 30-year loan is also the best option for millennials concerned about cash flow. And with a 30-year, you can always pay it off faster by contributing more than the minimum payment amount any time you have a little extra money. Splitting your mortgage bill into twice-a-month automatic payments also lops several years off.
The 20-Year Mortgage
Most home buyers swing to one extreme or the other. They either want to get their house paid off as soon as possible, or they want to shell out as little as possible on a month-to-month basis to maintain their lifestyle. But there is one more little-utilized middle ground: the 20-year mortgage. Rates will be better than a 30-year and you’ll have more spending money each month than if you had a 15-year. There are really no cons.