Why You Should Not Get A 15-Year Fixed-Rate Mortgage
This Article Is About 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
- They do not forsee any potential financial setbacks and take the 15-year fixed-rate mortgage option
- 15-year fixed-rate mortgages have lower rates than a 30-year fixed-rate mortgage
- However, the payments are higher since it is amortized over 15 versus 30-years
- The idea of choosing a 15-year mortgage is tempting and attractive for homebuyers due to being able to pay off the mortgage in a shorter period of time
- However, nobody can predict the future
- Financial problems due occur
- A home is most people’s largest investment in their lifetime
- We will pin point reasons Why You Should Not Get A 15-Year Fixed-Rate Mortgage
Why You Should Not Get A 15-Year Fixed-Rate Mortgage
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 who opt for 15-year mortgages do so because of the lower mortgage rates
- Paying off the loan balance in 15 versus 30 years mean saving tens of thousands of dollars in interest
- The idea in paying your home loan balance off in 15 versus 30 years is also very tempting
- One major disadvantage in option for a 15 versus 30-year loan is the monthly payments are higher
The higher monthly payments is for a period of 15 years and not short term. This larger payment may become a problem in the future 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 is 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
- Even workers with solid salaried jobs can get laid off and/or fired
- Nobody has a crystal ball to predict the future
- You cannot bank that your income will be solid for the next 15 or more 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
- Gap of employment means a halt to income
- This may affect your ability to pay all of your monthly bills on time
- A large monthly mortgage payment on a 15-year mortgage may add undue stress
- A larger mortgage payment may mean you cannot pay other monthly debt
- If you cannot meet your other debt obligations, you may tap into your high interest credit cards to cover the shortage
- 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 a wise idea.
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 to be 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 per month
- 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
- Not too much room to save or come up in an event of an emergency
- The right hand rule is to have six months of reserves for renters and 12 months of reserves for homeowners
- One month of reserves is equivalent to one month’s of all expenses
- Homeowners need a safety cushion and over one year’s reserves because repairs can cost thousands of dollars
Borrowers who do not have a lot in reserves and are living paycheck to paycheck should opt for a 30-year versus 15-year mortgage. For those with little to no savings should start saving as soon as possible for reserves.
How Much House Can You Afford
Just because you got a mortgage approval by a mortgage underwriter does not mean that the proposed housing payment is right for you and your family.
- Mortgage underwriters do not take into consideration your personal budget
- Your personal budget may include utilities, childcare, elderly care, tuition, after school activities, hobby and/or entertainment expenses, vacation expenses, pet care/supplies, medical/dental expenses, and other expenses that do not report on your credit reports
- A mortgage underwriter can approve a home loan with the 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 is 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 to pay 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 in the event your HVAC system or car breaks down and need immediate emergency money for repairs.
Risk Versus Rewards
For every positive there is always a negative. The rewards of a 15-year versus 30-year home loan are the following:
- Lower mortgage rates
- Save tens of thousands in mortgage interest during the term of the loan
- The reward of having a home with no mortgage in 15 versus 30 years
- Develop equity and net work as your home appreciates and the loan balance gets paid down quicker
The cons of a 15-year versus 30-year home mortgage are the following:
- Higher monthly housing payment over the next 15 years
- In the event a economic event happens, the homeowner need to make sacrifices to cover the housing payments
- Major financial strain if the homeowner becomes unemployed, changes jobs, or there is a disruption of income
- Delaying retirement savings and/or reserves
- Homeowners need to consider if they have enough savings for college if they have children
October 20, 2020 - 5 min read