You may think that having a long mortgage is like having a long toothache: better avoided when possible. But there are circumstances within which a 30-year fixed-rate mortgage (FRM) can be a smarter choice financially than a 10-,15- or 20-year one – even if you could comfortably afford the higher payments than come with shorter loans.
When you're deciding on the term of your next refinance or mortgage, there's one thing you need above all else: self-knowledge – because your personal needs, preferences, priorities, skills and financial strengths and weaknesses are absolutely central to choosing the right length of loan. But before getting on to those, let's see how a long mortgage can be beneficial.
Benefits of a Long Mortgage
In December 2015, Freddie Mac forecast that the average annual rate for a 30-year FRM during 2016 would be 4.4 percent. If you were lucky enough to get your current mortgage in the last couple of months of 2012, when that average was 3.35 percent, you're probably thinking 4.4 percent is high. But by any other standards – historical mortgage rates or current rates for other forms of borrowing – it's extraordinarily low.
And that's one of the two main arguments for maximizing the size and length of your mortgage: If you can access this sort of ultra-cheap borrowing, then you'd be nuts not to – or so some experts suggest. The lower monthly payments that come with a 30-year (or occasionally even longer) home loan give you room for some financial maneuvering: You can pay down any higher-interest debt you have on credit cards, personal loans and so on. You can build up a really strong emergency fund to cushion you against the unexpected. You can max out your 401(k). And you can avoid having to borrow later by instead saving up for those big family expenses such as college fees and weddings. Indeed, if you ever get on top of all those, you can use the spare cash to construct a potentially valuable investment portfolio.
The second key argument for a long mortgage concerns tax efficiency. The interest paid on mortgages is generally deductible when you file your taxes, making those ultra-low rates effectively even lower. Depending on the size of your loan and the rate you pay, this can add up, and many find it runs into four figures every year. Indeed, if you can find a high-yield investment that pays to you the same rate you're paying to your lender, that tax relief could see you make an instant profit.
Benefits of a Short Mortgage
Those arguments are persuasive, and a long loan strategy may well work for you. But it's important to recognize the downsides that come with it.
To start with, it will take you longer (often twice as long) to reach that joyous state of being mortgage-free. But equally importantly, as discussed in 6 Benefits of Shortening Your Mortgage Term, you'll almost certainly be paying a higher rate with a long mortgage, and the total cost of interest over the long lifetime of the loan will inevitably be very substantially higher.
It's All About You
So we're back to where we started: The most important factor in deciding on the right mortgage term is you. If you're fairly conservative when it comes to your finances, hate debt on principle and see your mortgage as a necessary evil, then no quantity or quality of argument is likely to sway you. You're not going to want to pay interest to anyone for one day more than is absolutely necessary.
If, on the other hand, you're an engaged and highly disciplined money manager with an eye on the long term, then maybe you should consider a 30-year loan, even if you can easily afford the monthly payments on a shorter one. For you, the advantages of a long mortgage could be significant.