Why You Should Think About a Weird Mortgage
McBride says mortgages with nonstandard repayment terms work best for a few specific types of borrowers:
- Buyers or refinancers who are approaching retirement and want to pay off their loans by the time they quit working;
- People buying low-cost properties who don't want to spend 15 or 30 years paying $50,000 or $100,000 back;
- Consumers who want to refinance and lock in today's low rates, but don't want to "reset the clock" -- replace a 15- or 30-year mortgage they've had for several years with a new 15- or 30-year loan.
But he recommends all borrowers looking at nonstandard mortgage terms consider whether they'd do better by simply taking out 30-year loans, paying lower monthly mortgage bills and using the difference for 401(k) contributions or other financial needs.
"For people who have 'undersaved' for retirement or emergencies, accelerating the repayment of a low-rate, tax-deductible mortgage might be a very low priority," the expert says.
Choosing a nonstandard mortgage term commits you to making higher monthly payments than you'd have with a 30-year loan even if you lose your job or face other setbacks, he adds.
"You want to be very careful about locking yourself into a higher payment that could become untenable in the future," McBride says.
Another alternative is simply taking out a 30-year loan and adding a little extra principal to your bill whenever you want. That doesn't lock you into a higher monthly bill. TheStreet.com and other websites have online calculators that can help you figure out how much to add each month to pay back a loan by a certain date.
Still, McBride says an eight-, 13- or 27-year mortgage can work well for certain consumers -- it all depends on the specific situation.
"There's a reason they call it 'personal finance,'" he says. "The right answer for you will depend on your personal circumstances."