Opt for a 30-Year Fixed-Rate Mortgage
Old-Think: The most important thing is to pay off your mortgage as quickly as possible.
New-Think: Never mind 15-year mortgages; stick with the traditional 30-year plan. Many of us can relate to Mia Brush's confusion about 30-year vs. 15-year mortgages. "I grew up hearing my parents talk about paying off their mortgage as soon as possible," she recalls. When interest rates dipped in 2003 to historic lows, Brush, a fundraising consultant, and her husband, Jason, an advertising agency professional, figured it was time to switch to a 15-year mortgage on their three-bedroom home in Los Angeles. With plans to have a baby within the next year or so, the couple wanted to get their house -- and their finances -- in tip-top shape.
They consulted Eileen Freiburger, president of On Your Side, Inc., a financial-planning firm in El Segundo, CA. Her advice: Stay with a 30-year fixed-rate mortgage, which requires lower monthly payments and offers more flexibility. "A 30-year mortgage can be paid off more quickly if you find yourself with extra cash," she says. Simply include an extra principal payment, whatever you can afford, with your mortgage check each month. Even $100 extra will make a big difference. During months when other financial demands prove pressing, you don't have to make the extra payment.
If a family signed up for a 15-year mortgage instead, it would be committed to paying higher bills each month, despite the lower interest rate. Freiburger calls that "an unnecessary burden at a time when the family's income may shrink and its expenses will rise." (Mia wasn't sure when and how much she'd want to work after the baby's birth.) The bottom line: It's more important to pay off your credit-card bills and save for college and retirement than to opt for a quick 15-year mortgage.
That's just what Mia and Jason did. They refinanced their home with another 30-year fixed-rate mortgage. Thanks to the house's appreciation in value and low interest rates, they were able to borrow enough money to pay for renovations to make their house more kid-friendly.