Is a Fifteen Year Mortgage a Good Bet?
A fifteen year mortgage is a great bet, if you’re inclined to gamble on a couple of things. The first, obviously, is that you’re betting on your ability to pay the higher mortgage rate over the long haul. If you have your own business, you have control over your employment situation. Then the question turns to whether your business or your career has the legs to be as successful for the next fifteen years as it is now. Are you in a cyclical business, affected by economic downturns? Most are, and if your fifteen year mortgage is a stretch for you in the first place then it’s a major gamble. If you’re salaried and safe from the slings and arrows of the economy, then it’s a safer proposition.
How Much is on the Table?
The savings in plain old dollars is substantial. One mortgage calculation tool compares the figures generated by putting a $100,000 mortgage into fifteen year terms and thirty year terms. The monthly payment is about $735 a month over fifteen years and about $955 a month over thirty years, with an interest rate that is a quarter of a point higher. The difference in total interest payments is a little over one hundred thousand dollars: $169,000 versus $64,000. Those are raw dollar figures, however. What is not factored in is your savings on your annual taxes engendered by the higher interest rate attached to the thirty year note.
Also not factored in are a number of intangibles. Where would that extra money go if it weren’t committed to a fifteen year mortgage payment? Other investment opportunities, perhaps? Perhaps. But there’s a reason they call leftover money like that “expendable income.” The reason is that most of us do expend it, rather than invest or save it. So maybe the thirty year note means better family vacations, a few ski trips during the winter, a nicer car – without doubt it means some added flexibility in the family budget.
The value of retiring a mortgage in fifteen years is substantial, but so can be the risk. If you’re seeking middle ground, consider a mortgage that accepts accelerated payments on a spot basis. When your family income is humming along, pay a higher monthly mortgage rate and you will get a larger figure attached to your principal reduction. You will be paying the higher (30 year) interest rate with those payments, so your annual tax deduction will go up as well. You’re knocking time off the mortgage, and maintaining your maximized tax deduction.
All the Hypotheticals
Some money managers will call the fifteen year mortgage a sucker’s bet, because if you took the monthly “savings” from the lower payment on a thirty year note and added it to the “savings” from the higher tax deduction on a thirty year note, the total in funds “saved” would more than offset the difference in total interest.
It’s a great theory, probably has some merit, but how many of us will diligently sock away our monthly “savings” and yearly “tax break” inherent in the difference between a fifteen year mortgage and a thirty year mortgage? Approximately none of us. Most people look at home appreciation as their return on investment, and let it go at that. Put in a financier’s terms, if a thirty year note cuts your sleepless night quotient by a factor of twenty percent or more, it’s probably worth it.
If you’re Muslim and are concerned about financial products that comply with Sharia Law, there are more and more options available to you today. The first Islamic bank in the UK, the Islamic Bank of Britain, opened its headquarters in Birmingham in 2004, offering a range of products and services such as pensions, mortgages and loans.
The main requirement for financial products and services under Sharia Law is that they neither charge interest nor pay it out, as making money from money is considered usury, and that they do not invest in companies that are deemed unethical, such as those connected with alcohol, tobacco, pornography or gambling.
What often happens when providing loans is that the bank will purchase an item for the customer at a set price and rent it or sell it to them, with repayments made in instalments. The bank makes its money by levying a charge on the customer’s payments.
With investments, Islamic finance works on the basis of sharing the risk as well as the reward. Both the customer and the bank agree on terms for sharing the risk of any investment and split any profits equally between them.
The four main modes of Islamic banking are known as murabaha, where a purchase is made by the bank and re-sold to the customer without any interest payments; musharaka, a partnership in which the rewards and risks – i.e. the profits and losses – are shared by both the bank and the customer in an investment; mudaraba, where someone places their investment in the hands of an expert who invests for them and shares the profit but doesn’t bear the risk of any losses; and ijarah, a rental agreement made in order for the customer to obtain goods, in which rental payments are made over a specified period and the bank reclaims the goods at the end of it.
Many of the high street banks offer Islamic products, and there are some Middle Eastern banks with branches in the UK that provide financial products and services suitable for muslims.
The government introduced child trust funds in 2005 to help new parents to start saving for their child’s future. Upon the birth of a child, they are given Ј250 in vouchers to invest on their behalf, and an additional Ј250 on the child’s seventh birthday. Additional contributions of up to Ј1,200 can be made annually, and the money can be invested in savings accounts or in stocks and shares, or a combination of both (a stakeholder account).
A Sharia-compliant child trust fund is also available for the children of Muslim families, and is provided by the Children’s Mutual. It’s a stakeholder account, which invests in the stock market until the child turns 13 and then transfers the funds into a savings account or lower risk investments such as government bonds. This aims to reduce the impact of any stock market slumps in the run-up to their 18th birthday. All investments are made in funds that don’t compromise Islamic principles, and no interest is paid on the savings.
As mortgages are interest-charging loans, they are not considered acceptable to the Islamic faith. However, as most people can’t afford to pay cash to buy a property outright, there is a demand for Sharia-compliant mortgages among the Muslim community. Many high street banks now offer such products, as does the Islamic Bank of Britain. An Islamic mortgage normally works by means of ijara, a leasing agreement in which the bank purchases the property on behalf of the customer and charges rent to them (including a handling fee) until the purchase price is repaid, at which point the customer owns the property outright. As with other mortgages, the bank retains the rights to the property until this point.
To comply with the Islamic faith, bank accounts should neither charge nor pay interest. This normally means that there will be no overdraft or credit card facilities on current accounts, and that savings accounts invest money to make a profit rather than receive interest on it.
A few financial organisations now offer Islamic pension schemes, allowing Muslims to invest for their retirement without having to compromise their beliefs. Such schemes invest only in funds considered to be ethical under Sharia Law – i.e. no investment in companies involved in alcohol, tobacco, betting or pornography, or any companies such as banks that profit from charging interest. If any dividends arise as a result of business involvement in any of these areas, the money is ‘purified’ by giving it to charity rather than awarding it to those investing in the scheme.