Friday, May 7, 2010

The 15 Year Mortgage – Why It Makes Sense

I think most people know that a 15 year mortgage is a good deal. But I think a lot of folks don’t know how great of a deal it really is. I think there are two good reasons why you should consider a 15 year instead of a 30 year mortgage.

First, the math works - let me break it out for you:

The 30 year $150,000 mortgage at 6.00%:

Monthly payments of principal and interest = $899.86

Total interest cost over the life of the loan = $173,944.96

The 15 year $150,000 mortgage at 6.00%:

Monthly payments of principal and interest = $1266.31

Total interest cost over the life of the loan = $77,924.92

As you can see, the 15 year mortgage saves the borrower almost MortgageServicing$100,000 in interest cost over the life of the loan! This example is even a little unrealistic – a 15 year mortgage will have a lower interest rate than a 30 year mortgage, which saves even more money! What is the extra cost to you? It only requires approximately $350 extra a month.

The second reason I like the 15 year mortgage is simple. How cool would it be to own your home free and clear in just a few short years? From that point on, all you have to pay are the taxes and insurance! Wow, I don’t know about you, but that gets me all kinds of excited.

So after you decide that this is the route you want to go, the natural question is: how much house should you buy? Well there is a simple rule of thumb we use in the industry. Your total housing expense (principle, interest, taxes and insurance) should not exceed more than 25% of your monthly take home pay. So here are two calculations to help you determine what that is for you.

If your household makes $70,000 annually and your monthly take-home pay is about $4650 (assuming a 20% tax rate) then:

$4650 x .25 = $1,162.50 total monthly housing expense

Conversely, if you are looking at a house and the monthly estimated costs of the home on a 15 year mortgage total $1600 per month. Your monthly take home pay would need to be:

$1600/.25 = $6400 total monthly take home pay

This is a very conservative way to determine how much house is affordable for you. Some other people might say that this is too conservative, but in my opinion I would rather be in a house I can afford with a few extra dollars to spare than the alternative. Once you start looking at mortgages and the costs associated with closing on a property it might get confusing. If you have any questions give us a call, we would be happy to help.

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