Should we go for a 15 year or 30 year mortgage?

Should we go for a 15 year or 30 year mortgage?

Morning!

Wanna ask your advice in a moment, but let me hit you with a quick status of where we are in our home purchasing journey so far as I know you’re on the edge of your seats over there 😉

  • The Mrs. has abolished the back up idea of renting so we’re now 100% on for owning!
  • Which I *think* I’m okay with now, but still a bit nervous of course since it’s all happening so fast…
  • Although I will say that we got close with *two* homes so far, which gives me hope that the “right one” is out there just around the corner!
  • And we still have roughly 2 months to lock one in heading into peak season here, so I think we should still be okay and not have to worry about settling just yet (I just wish we knew ahead of time *which* houses will be coming on the market so we can make the best call!)
  • On the flip side, it also seems like we’ve entered a *seller’s market* now with houses flying off the shelves within 48 hours, which means when we DO find the one that fits our family we have to go all out and fight for it which hopefully doesn’t mean throwing more money at it (which I refuse to do, so the Mrs. better have a better back up plan!! :))
  • And lastly, we’ve expanded our target communities now from one area to two areas we love, so hopefully that should make the options better as well, although the first one is still the nearest and dearest to my heart since a good friend and her kids live there…

So that’s where we’re at for now… And I gotta say, it’s a far cry from just a month ago of me FREAKING THE HELL OUT! Haha… It’s amazing how fast you can adapt to stuff when they come up in life!

So keep on sending over positive vibes please!! I’m hopeful our house is out there!!

And in the meantime, it’s been head down in the *financial* aspect over here which should be no surprise to anyone that it’s been the most fun part of the process 😉

After getting pre-approved through two different places so far (USAA and a mortgage broker recommended by our realtor), it looks like we’re hovering in the $650k-$800k range of what we can “afford” based on their assessments, which of course has nothing to do with what we can REALLY afford, but at least looks good on paper 😉

Our true budget is actually closer to $350k, and might even go down to $330k depending on which area we end up in, and I’m feeling pretty good about that since it means our mortgage will be in the mid $200’s after we plop down 20%.

Which leads us to today’s question of whether it’s smart to go for a 15 year mortgage and save THOUSANDS on interest as well as a quicker pay off, or keep it nice and safe with a 30 year and much lower payments in case money’s tight some months/years?

I’ve hinted in previous articles that I was set on the 15 year since we can fortunately afford it and it’ll only push me to paying off the mortgage faster, however surprisingly I’ve gotten a few comments from people I respect on how the 30 year is a much better option to go. Despite the savings!

Here’s one of them I’ll single out, just because it comes from a financial journalist and author who you’d expect to say the opposite 😉 Per, Kathy Kristof:

I promise to stop popping off after this… BUT… Buy a house that you can afford with a 15year mortgage, but get the 30-year mortgage. Why? You can pay it off in 15 years, if you want. But, if something goes wrong — you lose a job; have a big financial crisis that needs to be addressed, etc. — the 30 year mortgage gives you the flexibility to drop down to the cheaper payment, without jeopardizing your house.

People get enamored with the idea of saving all this money with the 15year loan. But the interest rate on this loan is only slightly cheaper than the interest rate on the 30-year loan. And for that slight differential, you buy yourself a TON of flexibility. Again, there’s no penalty for paying off a 30-year loan in 15 (or 10 for the matter), but you don’t have to….

Enamored  – hah! That’s me! 🙂 But I’ll agree on her points of flexibility here, as that’s exactly the loan we had ourselves the first time around and it was nice to be able to make extra payments whenever we wanted but weren’t forced to. Not that we knew what we were doing back then anyways, haha… We literally bought a house with no money down and financed 100% of it (!!!)

But I do wonder if now, with over 10 years of wealth building and *learning* under our belts, we could better withstand the volatility of life over the years? And if so, wouldn’t it be best to maximize the savings?

Kathy’s right that the 15 year rates are only “slightly cheaper” than 30’s, but a fraction of a percentage point – or in our case when I first got quoted – almost .75% of a point! – can still make a helluva difference over the long term!

Check out this quick comparison off google’s mortgage calculator I just did to put it in better perspective… I’m using $280,000 as the mortgage since we’re putting down 20%, and I left the default interest rate alone since it looks about right anyways w/ our credit scores:

30 year mortgage @ 3.92%

30 year mortgage calculator

(A total of $476,597 – crazy!!!))

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15 year mortgage @ 3.17%

(0.75% less than the default rate)

15 year mortgage calculator

As you can see, that’s not exactly “slightly cheaper!” Haha… We’re talking a difference of paying a total of $476,597 with a 30 year or a total of $352,189 with a 15! That’s $124,408 less!!

And sure, you can still pay more off every month and knock down that interest/time substantially, but you’re still coming up short even with paying *the same amount* every single month like w/ a 15:

30 year mortgage @ 3.92%

(paying an extra $633/mo)

extra payments mortgage

(via mortgagecalculator.org)

Now this route gets you a LOT closer, saving you an additional $98,576.49 and almost 14 years off the original 30 year!, however you’re still about $26,000 short compared to sticking with the original 15.

And of course, this assumes that you’re indeed contributing that $633/every month too and not being tempted or forced to divert! Which is a lot easier to say than do 😉

And that’s really the heart of this Big Question at the end of the day…

Is the savings of $26,000 – $124,000 a better bet than the flexibility of lower payments stretched across a longer period of time? Or is it better to play it safe, knowing quite well that life doesn’t always work out as we all plan?

With a 15 we’ll be spending a little more than we are now in rent ($2,300) when you add up the insurance and taxes and everything else (those calculations weren’t accounted for in the above examples), but I feel like we have enough assets to fall back on nowadays than we did back then if in fact life really did get so dire? And worse case God forbid one of us dies, our $350,000 insurance policy should be more than enough to cover the remaining loan!

I’m obviously leaning that way, but I’ll admit Kathy and gang have got me second guessing, haha…

But that’s again why I need your help today!! To help me put things in better perspective, especially if I’m missing something?? Because I really can’t get over those insane savings!! 🙂

So tell me – have you ever tried a 15 year mortgage before? Or any other shorter terms? How did it end up working for you?? On the flip side, how are your 30 year mortgages going for everyone rockin’ those?

I might not always agree with everyone’s opinion, but I read and appreciate EVERY LAST ONE and like to think it makes me a better overall person! Haha..

So let me have it!! Tell me what you’d do if you were in my position? I need more outside advice!

Thank youuuuuu…

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Fun fact: Our house budget now with almost $900,000 net worth is the exact same as it was over 10 years ago with approximately $30,000 net worth! Hah!

 

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