Ask Money

Take out a longer mortgage

Chris Farrell May 27, 2010

Question: I am about to sell my home to move closer to my work location and my son’s school. I plan to put 50% down on a $250,000 house. I can afford a 15 year mortgage (I currently have a 20 year mortgage for $150,000), but am considering a 30 year loan so that I can save more money for my son’s college expenses. He’ll start college in about 6 years. Given how few people own half their houses, is the added future interest an adequate offset to improve my cash flow for other parts of my budget? I am divorced and cannot count on my former spouse to pay for our son’s education. Mary, West Richland, WA

Answer: I would definitely lean toward taking out the 30-year fixed-rate mortgage to ease your monthly cash flow burden.

I think the trade-off of upfront financial relief so that you can save money is well worth the long-term prospect of increased interest payments. I would invest the savings conservatively since 6 years is not that far off. (Believe me, the day your son goes off to college will come much faster than you think.)

Here’s the thing: The trade-off of short-term savings versus long-term cost isn’t writ in stone–or the contract. Assuming there’s no prepayment penalty with the 30-year mortgage (there shouldn’t be, just make sure there isn’t when you shop for a mortgage), you can always accelerate your mortgage payments. You could eventually turn it into a 20-year or 15-year mortgage on your own if several years from now your finances allow it.

One last thought: You clearly want to put down a big down payment. But would it be better financially if you put down, say, a third instead of half? This way you would have a larger cash savings cushion and less money tied up in the house? Again, you can always put more money toward aggressively paying down principal later on.

The final point is a comment: I hope your ex does help his son out financially with college. Yes, you’re divorced but he’s still a parent and college is a valuable way for parents to prepare their children for the world of work.

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