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'Forget 15-year mortgages. Do 30,' says self-made millionaire—here's why

CNBC logo CNBC 9/16/2020 Kelli Grant
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With mortgage rates hitting record lows, it can be tempting to consider a 15-year-mortgage instead of one spanning 30 years.

The draw: The interest rates for 15-year loans are lower, currently 2.65% versus 3.03% for a 30-year, according to Bankrate.com. Combined with a shorter timeline, you'll pay substantially less in interest overall, build equity faster, and be debt-free sooner. But there's a catch: Your monthly payments will be much bigger than with a 30-year mortgage.

That's a big commitment, points out self-made millionaire Steve Adcock, who retired in his 30s.

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"Possibly unpopular opinion: Forget 15-year mortgages. Do 30," Adcock suggested on Twitter earlier this summer. "Why? Because making extra payments can turn it into a 15-year. And, you can reduce your mortgage payments if times get tough, then resume higher payments later. Give yourself options. Flexibility is nice!"

How a 15-year mortgage compares to a 30-year

If you borrow $200,000 with a 30-year mortgage at current rates, your monthly payment would be about $846. Over the life of the loan, you'll pay almost $105,000 in interest.

Opt for a 15-year loan instead and your payments will be roughly $500 more, or about $1,348 per month. But you'll pay just about $43,000 total in interest, less than half as much as with the 30-year loan. 

Most homeowners benefit from a 'super-duper flexible mortgage'

Adcock's point of view isn't actually unpopular. Financial experts agree that the flexibility of lower monthly mortgage payments is important for many homeowners.

"I've explained it to clients this way," says Mark La Spisa, a certified financial planner and president of Vermillion Financial Advisors in South Barrington, Illinois. "If you had a 15-year mortgage and a 15-year super-duper flexible mortgage, which one do you think you would choose?"

Most them then ask what a "super-duper flexible" mortgage entails. "If you need cash, the payments can drop 20% if you want any time you want," he says, "and the rate is only about a quarter of a point higher" than the typical 15-year loan.

The punchline, La Spisa says, is the "15-year super-duper flexible mortgage" is a 30-year mortgage that, like Adcock suggested, you pay back more quickly as your finances allow.

When your financial situation allows, you can put extra money toward your balance and pay off the loan faster — as Adcock put it, turning it into a 15-year. But when money is tight, then you can take advantage of the 30-year's lower payments and use the difference to help with other bills, says Greg McBride, chief financial analyst for Bankrate. You're not locked into that large payment.

"Money in the bank will pay the bills; home equity will not," McBride says.

The flexibility of a lower mortgage payment also helps if you have another goal to pursue, like bolstering your emergency fund, paying down high-interest-rate debt, or getting on track with retirement savings. Given the low interest rate on mortgages, investing the difference can be an especially smart move.

"A 15-year fixed may be a great choice, but that's often for someone who has already checked the other boxes: They're already maxing out their retirement savings, have no high-interest debt, and have adequate savings," McBride says. "Unfortunately, too few people have checked all those boxes."

The article "Forget 15-Year Mortgages. Do 30, Says Self-Made Millionaire" originally published on Grow+Acorns.

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