3 years ago, Nicole and I moved into our forever house. It was love at first sight.
Compared to our previous 1,100 square foot bungalow, this new tri-level home had a bigger yard, an open floor plan and neighbors that became instant friends of ours.
When it came time to choosing the mortgage, we didn't want our dream home to turn into a nightmare.
After doing some research, our mortgage strategy went something like this …
Mortgage Situations We Avoided:
- Interest-Only Mortgages: These are mortgages where you only make monthly interest payments and the principal of the loan does not decrease. If the principal of the loan never decreases, you are going to paying that mortgage for a LOOOOONG time.
- Adjustable Rate Mortgages (ARM): This is a home loan where the interest rate adjusts after a set period of time (typically 3, 5 or 7 years) and could result in a higher rate than you originally started with. As the interest rates are starting to increase (as of this post), this could be a very dangerous loan to be in if the term of your ARM is about to expire.
- Private Mortgage Insurance (PMI): This insurance protects the mortgage company from your potential default on the loan and is NOT insurance that protects you as the homeowner. If you put less than a 20% down payment on your home, you could have to pay an additional 1% of the mortgage loan value each month to protect your lender. For example, on a $200,000 loan the homeowner could be paying an additional $2,000 per year or $166.67 per month in PMI. That's A LOT of green!
After we avoided those three money stealing mortgage products, then it came time to discuss whether we'd want to go with a 15-year mortgage or a 30-year mortgage.
5 Reasons We Went With a 15-year Over a 30-year:
1. Less $ For Them, More $ For Us
When we decided to buy our new house, we were committing to a $200,000 mortgage.
We looked at both a 30-year mortgage around 4% and a 15-year mortgage at 3%.
The 15-year mortgage did require us to have a much larger monthly payment, but we would be saving almost $100,000 over the life of the loan if we went with the 15-year mortgage.
Let me say that again … WE WOULD BE SAVING NEARLY $100,000!
|$200k Fixed Mortgage||15-Yr at 3%||30-Yr at 4%||Savings|
|Full-Term Interest Paid:||$48,609.00||$143,739.00||$95,130.00|
Instead of giving the mortgage company $95,130, we decided to keep it.
2. Interest Rate Savings
Similar to the point above, if you have the ability to go with a 15-year fixed instead of a 30-year fixed you may see about a 1% difference in your interest rate.
1% may not see like a whole lot, but when you are paying a loan for 30 years it adds up. Refer to $95,130 savings above!
Hello Pocket! Meet my friend More Money!
3. Disciplined Payments
If you choose a 15 over a 30, you will have larger monthly payments. This is a deterrent for some, but a smart disciplined move for others. In the example below, the 15-year is about $400 more per month than the 30-year:
|$200K Fixed Mortgage||15-Yr at 3%||30-Yr at 4%|
Not including taxes & insurance
For my wife and I, we wanted to insert that discipline into our monthly payment structure so that we could pay this mortgage off faster.
That $426 (and more because of interest savings) attacks our mortgage principal each month and gets us that much closer to complete debt freedom.
4. Become Completely Debt Free
As demonstrated above, the 15-year mortgage created the quickest path for us to reach complete debt freedom. That has been a goal of ours for quite some time now. And we're only 1-year away from making that a reality!
When we're completely debt free, we're going to be able to live more, give more and save more.
We're looking at an additional $35,000 annually in our budget when the mortgage is NO MORE.
5. Short Term Pain for Long Term Gain
Yes, the monthly payment will be bigger in the short-term on a 15-year over a 30-year, but choosing a 15 now will help reduce major stress later in life.
When we don't have a mortgage at the end of next year, I know that I will personally feel a gigantic weight off of my shoulders. Right now, I feel the pressure to earn a lot more in order to cover the mortgage, our expenses and plan for retirement. That stress will melt away when this mortgage is gone.
The 15-year helps to accelerate the mortgage pay off process and brings us closer to more stress free lifestyle in the Hill house.
What do you think about a 15 versus a 30?
Could you see this working for you?
We refinanced to a 15 year loan two years after we bought our house. I wish we would have done it from the beginning. Our interest rate dropped 1.5% by refinancing.
Nice work! More money for you and less for them. It definitely makes the payments higher but I believe it’s worth it in the long run. Thanks for the comment!
We were able to pay cash for our first home which has been great. If we ever decided to buy again and can’t pay cash I think 15 is the way to go. Especially if there is a good spread in the interest rate. Although I really love not having a mortgage! So we would need a darn good reason to move. =)
Well the only mortgage better than a 15-year is a 0-year mortgage– nice work!!