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15 yr Fixed v 30 yr Fixed mortgage?

So my wife and I plan to buy a home in the Minneapolis area around November of this year. We are both gainfully employed, have low levels of debt (I have none, she has some minor CC debt, a few thousand left in student loans, and car loan) and have enough for 20% down. Our credit scores are both high (above 750 for her, low 800s for me) and we got pre-approved for a $275k loan at 3.65% (a few weeks ago, I know rates have dropped - additionally $275k is the high point of our housing range).

The monthly mortgage cost (pre-insurance & tax) is a few hundred less than what we pay for rent currently (using a 30 year fixed) but I'm wondering what benefits there may be w/ going with a 15% fixed? Obviously you pay less interest over time compared to a 30 yr fixed at the expense of higher monthly payments. Is there anything else I haven't considered about the pros of a 15 compared to 30? Admittedly I'd rather have the lower monthly cost but this is a house we would intend to live in for a long time (and obviously planning kids in the near future).

Apr 09, 2015 by Colin from Oak Creek, WI in  |  Flag
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Hello Colin,

Congrats on the impending home purchase. If I were in your shoes I would consider a couple of things before making my final decision. Can you afford the 15 year payment currently, if one of you lost employment, became disabled etc.? Are you positive you want to live in/own that house for 15 years? If not you might consider a longer payment. Remember that you can always make extra payments towards the principal balance on the 30 yr loan, in fact many people make payments bi-weekly instead of monthly and just by doing that it will shorten the loan by a few years. I would also consider locking in your fixed rate once you find your dream home and are ready to buy as that will make the buying and financing process a bit more predictable. Typically you can lock in fixed rates when you are 30-90 days out from purchasing. I hope this helps, good luck!

Best regards,

Curtis

View all 4 Comments   |  Flag   |  Apr 09, 2015
Colin

Thanks Charles, I've never heard of a 20 year mortgage but that is actually a pretty nice compromise between a 15 and a 30 (it would still be less than what we currently pay for rent too). I'm sure my wife and I will either go w/ a 20 year mortgage or agree to pay ahead from time to time. I've heard when it comes to paying ahead, I hear that sometimes you can indicate on the check that it's a payment towards the principal and not just paying next month's payment ahead of time. Is this correct that some kind of notification needs to be made to the check?

Flag |  Apr 13, 2015 near Oak Creek, WI
Charles H. Self III

At your home closing, ask your lender the best way to ensure that extra payment amounts reduce principal. Often, you receive a statement and there is a place to indicate extra principal payments. But each mortgage lender has a different method.

Flag |  Apr 13, 2015 near Appleton, WI

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John Essigman Level 17

Hi Colin,

I would agree with Curtis … you can always pay more on your mortgage if you choose to do so. However, should some emergency or calamity befall your family, you will not be able to pay less if you are locked into the 15 year mortgage payments.

You can certainly pay more on the principal, which will help you pay off your home sooner. You can also cut about 7 years off of a traditional 30 year mortgage by paying it twice per month. You don’t pay more you simply pay more often. This technique short-circuits the interest rate cycle.

An alternative … never pay-off your house. Reason … home equity is money that is not working for you. But be careful as this method is fraught with risk and emotional issues.

Warmest regards
John Essigman www.bluecreek.net

2 Comments   |  Flag   |  Apr 10, 2015 from Cleveland, GA
Colin

John would you expand a bit about never paying off our house? Obviously the mortgage interest needs to be considered for itemized deductions so I can understand possibly not wanting to lose that tax related item. Are you implying that those that pay off their houses will often then dip into their home equity to splurge, feeling that they can do so knowing there is no longer a mortgage against the home? If that's the case, I can understand the caution, but my spouse & I aren't the type of people who I can envision dipping into our home equity because a) she's frugal, I'm even more so and b) we both hate shopping and buying things we don't need.

Flag |  Apr 10, 2015 near Oak Creek, WI
John Essigman

This is not the best format for such an in-depth discussion... money in-hand may have more value than money tied-up in hard assets. "Use other people's money".

A house will appreciate by the same amount, about 4% annually, regardless of how much equity or debt you carry. The equity earns about -4% depending on the rate of inflation, so with these numbers it’s a wash. Assume that your mortgage is 4% less any tax benefits and you can earn 4% on your money less the cost of taxes. Again a wash, more or less… unless you can get creative and/or aggressive and earn more than the cost of your note. Money in-hand today has more value than money later due to the time-value of money.

Finally, cash in-hand is easier and less costly to access than trying to gain access to the equity in your home. In some cases, losing your job for example, refinancing can be out of reach.

This is not for everyone, there is a cost for peace of mind, and certainly a bad idea if the money is used for personal consumption. From a purely technical perspective, your home is not an investment… from a family nest perspective the home is sacrosanct and should be paid-off.

Flag |  Apr 10, 2015 near Cleveland, GA

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