There is more to buying a home than just picking out what neighborhood you want to live in or the number of bedrooms you want. Obviously, cost is a primary factor, but is it one that most people give a lot of thought to? Have you considered the benefits of a 15-year mortgage over a 30-year mortgage? Most of us never entertain the idea of a 15-year mortgage because we automatically assume that it will not be financially feasible. A shorter-term home loan can radically change your financial future, and it may not be as out-of-reach as we assume. With this in mind, it is worth considering the cost and benefits of a shorter length mortgage, whether you are looking to purchase a home or possibly refinancing a current one.
CONSIDER YOUR FINANCIAL GOALS
Your home is most likely your biggest asset – or your most significant liability. Our home expenses every month typically are the largest portion of our budget; also, our home is considered a primary asset to draw upon in our retirement years. It is important to look at how your current home is supporting your overall financial goals.
- How many years before you plan on retiring? Will your home be paid off by then?
- How much will be your total cost into the home once it is paid off? (This is your cost basis)
- Do you have equity in your home now, or, based on expected housing growth, what will your home most likely be worth once it is paid off?
Most of us have no idea what the total cost into a home is. We think in terms of monthly payments instead of total cost. However, when we budget our income, and especially when considering our financial snapshot in our later years, it is wise to consider the big picture, i.e. the total cost of our home.
This is especially important for Millennials. Millennials associate owning a home with the “American Dream” more than any other generation, 65.3%. (Zillow. Jan 2016) However, they are waiting until later in life to purchase their first home, and they typically desire to be financially ready to retire at a younger age than previous generations. This means a 30-year mortgage may not fit into their overall life and financial goals.
BENEFITS OF A 15-YEAR MORTGAGE
Lenders are not usually eager to mention a 15-year mortgage because it means less profit for them, but on the flip side, it’s more money in your pocket! Let’s take a look at the advantages of a 15-year mortgage:
- Lower interest rate
- Build up equity in your home faster, which means financial flexibility in the future.
- Do not become a slave to your house payment for most of your adult life.
- Your house is more likely to be completely paid for before retirement.
- You can save hundreds of thousands of dollars in less interest paid.
- Money saved can greatly enhance your financial resources for retirement.
- People with a 15-year mortgage are more likely to pay off their home loan early. (source: Dave Ramsey)
Did you know that on a $250,000, 30-year, fixed-rate mortgage, with 10% down, at a rate of 3.99% (the current national average), will end up costing you $386,290*?
That same home with a 15-year mortgage at a rate of 3.14% (the current national average) will have an end cost of $282,421*. A difference of $103,869. Would that money help you in your retirement plan or other financial goals? You bet!
(*figures used do not include taxes, insurance, or other fees such as closing costs.)
I DON’T THINK I CAN AFFORD IT
I know you are thinking, “Yes, I know. That’s great and all, but we just can’t afford to have our payments doubled.”
Here’s the best part about a 15-year mortgage: Your house payment will only be 25-30% higher, on average, than it would be on a 30-year mortgage. That’s the beauty.
- Using the example above, the monthly payment on the 30-year loan would be $1,072.89.
- The payment for the 15-year loan would be $1,569, a difference of $496.11 per month.
For $500/month extra, you can save $104,000 AND build equity much faster. In addition, you eliminate a house payment out of your budget in half the time. How would that improve your quality of life?
Would not having a house payment decrease stress in your life? If you had an extra $104,000 in the bank, could you sleep a little better at night? If your home is paid for or has a significant amount of equity in it, will it ease your worry in the event of another housing crisis?
For some, adding a few hundred dollars a month extra to their house payment is not feasible, such as in the case of those who are barely able to afford to purchase a house. However, for the rest of us, adding a few hundred dollars a month now to save hundreds of thousands of dollars in the long-term is something to consider.
DIY EARLY MORTGAGE PAYOFF
I’m sure you have seen ads or heard programs that offer to help pay off your mortgage in 7 or 10 years, or something like that. Some of these are called Morgage Accelerator Programs and you PAY SOMEONE ELSE to shuffle your money around (in a nutshell). Be informed about what these programs are really doing to your money. Some are simply creating one loan to pay off another.
If you already have a mortgage but want to pay it off early, you can do it without paying anyone a fee! Strategies such as paying your mortgage twice a month or adding an additional amount to your regular payment can have your home loan eliminated in no time. Dave Ramsey has a wonderful Mortgage Calculator to help you determine how quickly you can pay off a mortgage by adding a small amount to your regular bill every month. Moreover, Dave has amazing resources and articles that you may find beneficial at DaveRamsey.com.
Paying extra on your monthly house bill is a great idea. In reality, according to the FDIC, 97.3% of us do not have the discipline to regularly pay extra on our mortgages. Life gets in the way and we all have a tendency to think that we can add money to our payment next month. But then little Timmy needs a new soccer outfit, your friends want to go on a weekend getaway, the refrigerator goes out, etc. Seems like life always provides an excuse to not pay extra on any bill we have, much less save any money. On the other hand, when we have a fixed payment, our resourcefulness comes alive in order to pay our bills and still do the things we want and pay for other “unexpected” life events.
If you are one of the 3% who can stay disciplined enough to pay down the house loan, go for it! If not, you may want to consider a 15-year mortgage or refinance to one if you are serious about building equity faster and saving a lot of money.
FINDING THE MONEY
If you and your family decide that a 15-year mortgage is an option you want to take advantage of, make sure you look at your complete financial picture. Keeping your total housing expenses at 28% or under of your income will ensure that you are not “house poor”. Also, your monthly debt payments (like credit cards, cars, etc.) should not exceed 36% of your income.
In order to save hundreds of thousands of dollars and build up strong equity in your home, it may require purchasing a less expensive home, driving a used car that you pay cash for instead of a new one with a payment, taking small vacations instead of big ones, or other changes in your life. Ultimately, it is up to you and your family to decide what your long-term goals are and how your house fits into those.
Remember, don’t just think of monthly payments – think of “total cost”. That one change in perspective could possibly change your future.