Buying Homes: Get a 15 Year Fixed Mortgage
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Have you ever known anyone that has found themselves with piles of debt, and yelled “WooHoo! Hey Honey, We’re doing great! We have huge piles of debt!” Of course not. No one is excited about being in debt. If you asked every American if they would like to be in debt or like to be debt free, 99 out of 100 would easily tell you that they would like to be out of debt. Generally a person’s home is their largest payment, and their largest debt item. Wouldn’t it be great to own a home free and clear? Your grass will feel different, trust me! So why not buy the mortgage that will enable you to have your home paid for the quickest?
When purchasing our next home, make sure you get the mortgage which will help you pay it off as soon as possible. At this point, many people will say they cannot afford a fifteen year fixed, time for some math. Assume you are going to buy a $100,000 at 7% interest. Your payment would be a total of $719.06 a month on 15 year fixed rate loan. If you were to fall back on an easier to pay 30 year loan, your payment would jump down to $532.24 a month. We come up with a difference of 186.82. If this breaks your budget, you probably couldn’t have afforded the home in the first place. You can pay your home off early by fifteen years, that’s over 5400 days, if you just make a slightly larger payment!
Some will say, but what about the tax deduction? Isn’t it smart to keep my mortgage because I get a tax deduction? No. If you have a $100,000 mortgage at 7%, you are sending the bank $7000 in interest so that you can avoid paying about $2000 in taxes, that doesn’t make a whole lot of sense.
And then there are is the 1% who think they are smarter than everyone else and want to use debt in their favor. They will not pay their house off early because they think they can get a better rate of return somewhere else, such as in a mutual fund. Let me ask you a question, Would you borrow money on your home so you can invest it in a mutual fund? Most likely, you would not. Now you are thinking with your heart, and not your head.
Don’t play fancy games to try to get ahead, there’s no magic pill. Be wise, no one has ever felt bad about paying off their house. Get a conservative 15 year fixed mortgage, and just pay on it consistently.
8 responses to “Buying Homes: Get a 15 Year Fixed Mortgage”
kurt responds:
Posted: April 24th, 2007 at 4:50 pm
“And then there are is the 1% who think they are smarter than everyone else and want to use debt in their favor. They will not pay their house off early because they think they can get a better rate of return somewhere else, such as in a mutual fund. Let me ask you a question, Would you borrow money on your home so you can invest it in a mutual fund? Most likely, you would not. Now you are thinking with your heart, and not your head.”
And you advocate thinking with your heart? So long as I understand you correctly.
Minimum Wage responds:
Posted: April 24th, 2007 at 4:55 pm
Sounds great. Where do I sign up?
Rick responds:
Posted: April 24th, 2007 at 5:14 pm
Poor reasoning. By your logic, if we can afford a payment of $532, we must be able to afford a $719 payment. If we can’t afford the $719 payment, we can’t afford the $532 payment in the first place. Let’s extend that: since we can afford a $719 payment, we must also then be able to afford a $906 payment, right? What about $1093 payment?
No, I bought my house based on the 30-year payment I knew I could afford. Yes, I know the 15-year loan will pay off the loan much more quickly, and I can’t afford a 15-year payment. But that doesn’t mean I can’t afford a 30-year payment.
Finally, in my region, you can’t even think about buying a house for $100K. Houses haven’t gone for that price for over 10 years.
(I do agree that if you can afford it, you ought to go for the 15-year mortgage. But your logic on what we ought to be able to afford is a little faulty.)
Bill responds:
Posted: April 24th, 2007 at 7:05 pm
There are 2 things to remember. First, the 15 year payment often drives a persons DTI (debt to income) too high. The smarter thing to do is to make the 15 year payment on the 30 year mortgage. As a former loan officer ( I quit last week) too often people don’t want to hear the 15 year option, thinking that it is too much.
Blaine Moore (First Time Home Owner) responds:
Posted: April 27th, 2007 at 5:45 am
We went with the 30 year fixed because we knew that 5 months after we bought the house that we would be going down to one income when my wife (then fiancé) went back to school. However, we pay it like it is a 15 year fixed.
While your numbers are not that realistic (I wouldn’t be willing to live in anything around here that only cost $100k) you also miss another advantage of going with a 15 year fixed rate: You will probably get a quarter to a half to a full point off of your interest rate. That means that not only are you paying more each month, but a higher percentage of what you pay is going towards principal because your interest costs are much less.
InvestorBlogger - Blogging, Tech, and Making Money - “A Random Walk To Wealth” » Re-mortgage your house: Not unless it made sense, as well as dollars! responds:
Posted: May 1st, 2007 at 8:15 pm
[...] recently came across this post that suggested we should pay off our mortgages within 15 years, not the typical 25- or 30-year deal! Now that would be aggressive. And locking in [...]
Dasha responds:
Posted: May 15th, 2007 at 3:05 pm
Fixed in this market? Yes. But why get a 15 year loan and paint yourself into a corner? I have a 30 year fixed with no prepayment penalty, and make 15 year payments on it. If I have a tough month I can make a 30 year payment, be OK, and catch up the next month.
This only makes sense when you don’t buy more house than you can afford with a 15 year payment or live in a major urban area where costs are astronomical. Also you should be disciplined enough to live within your means and know what a budget is.
FH responds:
Posted: May 15th, 2007 at 5:54 pm
Oh, goodness… 15 year mortgage must be the best thing that ever happened to mankind, right? Wrong!!!
I am a 1% (according to the article). Do I think I am smarter than everyone else? Maybe not. What I do know is that I am more informed.
For those of you, ladies and guys, who like to think with their heads rather than any other parts of a body: it is called economics…
When it comes to all of this “Early Payoff” mythology, everyone forgets about LOC. What is LOC? It stands for: Lost Opportunity Cost. Simply put - every dollar spent is a dollar not invested.
Here is how it works. Get a 30-year fixed rate mortgage at - let’s say - 7%. Pay it off over the 30 years as scheduled. Take the difference in payment between 30-year and 15-year mortgage and put it away in the account earning the same 7% tax free (conservative fund invested in high grade bonds and some equities inside of a Roth IRA will do just fine).
After 30 years of doing that you will end up with tens or even hundreds - depending on the amount of a mortgage - of thousands of dollars more than if you go for 15-year mortgage.
If you don’t believe me, send me an e-mail. I will send you a spreadsheet with all of the details. If you think I am just another fool, talk to me in 30 years when your current strategies leave you nothing to retire with…
Thank you.
FH