You may want to try a combination of both. With this strategy, you take out a 30-year mortgage but plan to put extra payments toward principal over the loan to pay it off sooner. There are many ways to do this (putting extra toward principal each month, putting big chunks down here and there), but the bottom line is that you throw extra money at the mortgage principal whenever you can. If you do this, you will pay the mortgage off early and save money in the process.
However, you still have the flexibility of making just the lower required payment if cash flows get tight. If you plan to do this, you must make sure your loan contract specifies that there are no prepayment penalties.
So if you are a potential homebuyer, don’t just assume that a 30-year mortgage is your best bet because the monthly payments are lower. As you can see, picking the right mortgage term for your financial situation is complicated.
What’s important is that you consider the pros and cons of multiple home-financing options before you make any big commitment.
(Editor’s note: This guest column originally appeared on Investopedia.)
— By Rachel Podnos, financial planner at Wealth Care