15-year Mortgage vs. 30-year Mortgage

I made all the mistakes when I purchased my first home. I purchased a home with no money down on a 7-year arm and an interest rate of 7.25%. Luckily for me, I purchased the home in 2007 at the height of the market. I was sold the idea that I could purchase the home and sell it a few years later for a hefty profit. I watched as the housing market began to crash in 2008 and the value of the home plummeted. I carried around a burden of stress as I did not know what the future held. This experience was one that many had and provided me with wisdom for future home purchases. So what is the wisest way to purchase a home?

We would recommend that you wait to purchase a home until after you have paid off all consumer debt (to include student loans) and have a 3-6 month emergency fund saved. Purchase a home that is no more than 25% of your take home pay on a 15-year fixed mortgage. Saving 20% down will ensure that you avoid private mortgage insurance (which will increase your monthly payment). This is not what a lender would recommend, but that is because they get paid more when you they lend you more money. 25% of your take home pay will ensure that you do not become house poor. If you have a larger percentage of your income going towards your house payment, it become more difficult to invest in your retirement, save for kid’s college funds and have extra money to enjoy life.

A 15-year mortgage has several advantages, but the primary advantage is the amount of money it will save you over the life of your loan. If you were to take out a $350,000 at 3.25% interest for 30 years, you will have paid over $176,000 in interest over the life of your loan. If you take out the same loan for 15 years, you will have paid over $87,000 in interest. That is a savings of $89,000!!!!

A 15-year mortgage also ensures that you have a paid for house going into retirement. A paid for home stabilizes your largest expense. Chris Hogan’s Everyday Millionaire conducted the largest study of millionaires done in North America and found that millionaires paid off their homes in just over 10 years. The final benefit to a 15-year mortgage is that you will get a lower interest rate.

You home is likely your largest asset and can either be a blessing or a curse. Make a home purchase wisely. If you need assistance with creating a plan for your home purchase, schedule a free 15-minute consultation.

Stay safe and stay well.