Why You Should Not Get a 15-Year Fixed-Rate Mortgage

Why You Should Not Get a 15-Year Fixed-Rate Mortgage

Gustan Cho Associates are mortgage brokers licensed in 48 states

This guide covers why you should not get a 15-year fixed-rate mortgage. There are several good reasons Why You Should Not Get A 15-Year Fixed-Rate Mortgage. Most homebuyers are financially stable when they are in the process of buying a home. They are often confident their job and income will remain secure. John Strange, a senior loan officer at Gustan Cho Associates, explains why you should not get a 15-year fixed-rate mortgage as follows:

Homeowners do not foresee any potential financial setbacks and take the 15-year fixed-rate mortgage option. 15-year fixed-rate mortgages have lower rates than 30-year fixed-rate mortgages.

However, the payments are higher since it is amortized over 15 versus 30 years. Choosing a 15-year mortgage is tempting and attractive for homebuyers due to being able to pay off the mortgage in a shorter period. However, nobody can predict the future. Financial problems are due to occur. A home is most people’s largest investment in their lifetime. We will pinpoint reasons why you should not get a 15-year fixed-rate mortgage.

Why You Should Not Get A 15-Year Fixed-Rate Mortgage

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30-year fixed-rate mortgages are the most common and popular among homebuyers. Although, 15-year mortgages offer many benefits. They are less popular than the 30-year mortgage. Those opt for 15-year mortgages because of the lower mortgage rates. Paying off the loan balance in 15 versus 30 years means saving tens of thousands in interest.

Homeowners need a safety cushion and over one year’s reserves because repairs can cost thousands of dollars. Borrowers who do not have much in reserves and live paycheck to paycheck should opt for a 30-year versus a 15-year mortgage. Those with little to no savings should start saving as soon as possible for reserves.

The idea of paying your home loan balance off in 15 versus 30 years is also very tempting. One major disadvantage of the option for a 15 versus 30-year loan is the monthly payments are higher. The higher monthly payments are for 15 years and not short-term. This larger payment may become problematic if you lose your job, change jobs for a less-paying position, or other extenuating circumstances.

Job and Income Stability

Just because your job and income are stable, today does not mean it will continue to be so. The economy is booming, and the housing market is skyrocketing. However, just because we are in a bull market does not mean the economy will slow down. This holds true for workers who are on commission, such as car salespeople, realtors, loan officers, and insurance agents. A larger mortgage payment may mean you cannot pay other monthly debts. You may tap into your high-interest credit cards to cover the shortage if you cannot meet your other debt obligations.

If your flow of income remains halted for a longer period, you may face potential foreclosure proceedings and could lose your home. In today’s changing economy, keeping all costs, especially your mortgage, as low as possible is wise.

Even workers with solid salaried jobs can get laid off or fired. Nobody has a crystal ball to predict the future. You cannot guarantee that your income will be solid for the next 15 years. One of the main factors borrowers should consider when considering a 15-year versus 30-year mortgage is the potential instability of income and employment. The gap in employment means a halt in income. This may affect your ability to pay your monthly bills on time. A large monthly mortgage payment on a 15-year mortgage may add undue stress.

Why You Should Not Get A 15-Year Fixed-Rate Mortgage If You Are Living Paycheck To Paycheck

Things are not cheap today. An unexpected trip to the grocery store can easily cost more than $100. Eating fast food was supposed to be convenient and cheap. Not so. To feed a family of 5 at any fast food chain restaurant can easily top 50 dollars or more. A wage earner making $100,000 per year is no longer considered wealthy.

Many $100,000 wage earners with a family of 5 often live paycheck to paycheck with little or no savings. The math is simple. If you gross $100,000, your take-home pay after taxes and deductions is around $60,000, which turns out to be $5,000 monthly. Say you have two car payments totaling $1,000 per month. That leaves $4,000 left over.

The average home mortgage balance in the U.S. is $300,000, so your principal, interest, taxes, insurance (P.I.T.I.) will be estimated at $2,312.50 ($1,500 Principal and Interest, $500 for property taxes, $100 for hazard insurance, $212.50 for mortgage insurance). So now we have $1,687.50 left for food, utilities, childcare, and other expenses. There is not much room to save or come up in an emergency. The right-hand rule is to have six months of reserve for renters and 12 months for homeowners. One month of reserves is equivalent to one month of all expenses.

How Much House Can You Afford

Just because you got mortgage approval from a mortgage underwriter does not mean the proposed housing payment is right for you and your family. Mortgage underwriters do not take into consideration your budget. Your budget may include utilities, childcare, elderly care, tuition, after-school activities, hobby or entertainment expenses, vacation expenses, pet care/supplies, medical/dental expenses, and other expenses not reported on your credit reports.

A mortgage underwriter can approve a home loan with front end debt to income ratios (the housing ratio) as high as 46.9% on FHA loans and 50% on conventional loans (conventional loans do not have a front-end ratio and have one ratio, which is 50% DTI). These housing ratios are calculated from the gross income and NOT net income after taxes and deductions.

You do not want to be miserable and put everything you earn into paying your monthly mortgage payment. When calculating how much home you can afford, use your net take-home income and take 25%. 25% of your net take-home income should be a comfortable monthly housing payment. If the monthly 15-year P.I.T.I. exceeds 25% of your net take-home income, you may want to opt for a 30-year versus a 15-year fixed-rate mortgage. You do not want to be left without any cash reserves if your HVAC system or the car breaks down and you need quick emergency money for repairs.

Risk Versus Rewards Why You Should Not Get a 15-Year Fixed-Rate Mortgage

For every positive, there is always a negative. The rewards of a 15-year versus 30-year home loan are lower mortgage rates. Save tens of thousands in mortgage interest during the loan term—the reward of having a home with no mortgage in 15 versus 30 years. Develop equity and network as your home appreciates and the loan balance is paid quicker.

The cons of a 15-year versus 30-year home mortgage are higher monthly housing payments over the next 15 years. If an economic event happens, the homeowner must make sacrifices to cover the housing payments. Major financial strain if the homeowner becomes unemployed, changes jobs, or there is a disruption of income.

They are delaying retirement savings or reserves. Homeowners need to consider if they have enough savings for college if they have children. Nothing is wrong with opting for a 15-year versus 30-year home mortgage. A combination of lower interest rates and interest savings seems tempting. However, it may not be the best loan term for everyone. Everyone has a different financial profile and lifestyle. If the higher payment makes you or your family sacrifice other important objectives, it may not be worth it. Everyone needs to enjoy life and their new home and not stress with a high housing payment where they need to make important personal sacrifices.

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