This is a great question and we need to look at the numbers, facts and trends to determine if a 15-year mortgage is right for you.
Results of a study completed in 2018 – Americans retain their primary residence for an average of 13.8 years. What does this mean? By itself nothing. The first questions you must answer for yourself is how long you intend to live in the property you are buying. If you are the average American and will live in this property for 12 + years look at these numbers.
Here is the scenario:
Purchasing a $225,000 with 3.5% down assuming good credit.
The typical buyer will purchase this home using 30-year FHA financing with a down payment of 3.5% ($7,875.00). This mortgage will have a monthly principal, interest and mortgage insurance payment of $1,115.28 at a rate of 3.25% for 360 payments. If you stay in this home for 12 years you will pay a total of $160,600.00, of which only $60,052 will have gone towards your loan balance.
Let’s look at the Fannie Mae HomeReady with a 15-year term and a down payment of 3% ($6,750.00). This mortgage will have a monthly principal, interest and mortgage insurance payment of $1,669.36 at a rate of 3.50% for the first 44 months then the Mortgage Insurance drops off and the payment drops to $1,560.23 for the remainder of the loan. If you stay in this home for 12 years you will have 44 payments at $1,669.36 and 100 payments at $1,560.23 for a total of $229,475, of which $165,004 will have gone towards your loan balance.
The 15-year mortgage in this scenario increased your monthly payment by $554.08 for the first 44 months and by $445 for the remaining 100 months. You are lowering your balance by $105,000 more than using 30-year financing, but only paying $68,875 more. That is a $36,125 savings over 12 years or $3,000 a year.
That extra $554 a month is a lot I just can’t afford to do that!
OH, YES YOU CAN!
The average American spends $2,300 a year at America’s favorite coffee franchise! The difference between eating at home or eating out is $7 dollars per meal per person. The average American eats meals outside of the home 20 times a month. Family of two that is $280 a month in additional expense of or $3,360.00 a year. We are trying to find an extra $6,600 a year and with just cutting back eating out and expensive coffee in a green and white cup we found $5,600 of the $6,600.
If you can budget and sacrifice for a very short period, you can be in a significantly better financial position. Average life expectancy is 82 years. If you tighten your belt for 15 years (17% of your life), you will solve the problem that 85% of todays retirees are dealing with. Retirees today are spending an average of $17,000 a year or $1,416 a month of their $4,000 a month fixed retirement income (BLS report 07/22/2018 average retirement income in America is $48,000 per year) to keep a roof over their head. In 20 years of retirement that is $374,000.00. There is no investment, that I know of, that you can invest $554 a month in for 180 months and end up with the $374,000 that you will need to keep a roof over your head in retirement.
Before you go finance your first home or refinance for that lower rate, make a budget and look for wasteful spending. See if you can figure out how to make a 20- or 15-year mortgage payment. It is life changing.