Money guru Dave Ramsey has a lot to say about buying houses, and one of the things he’s most adamant about is choosing a 15-year mortgage rather than a 30-year mortgage.
He also says that you should wait to buy until you can put 20% down and avoid private mortgage insurance, and to temper your choice so the payment on your mortgage is no more than 25% of your monthly take-home pay.
Dave says that if you can’t afford the payment on a 15 year mortgage, you either aren’t ready for home ownership, or you need to scale down your wants in order to buy a home you can afford.
Why does Dave recommend a 15-year mortgage?
The first reason is obvious. If you stay in your home until it’s paid off, you’ll own your home in 15 years rather than 30.
The second reason is that you’ll spend thousands less to achieve that ownership.
Let’s look at the difference in what you’ll spend to own that house.
Say you’ve chosen a house that costs $250,000 and you’re able to put 20% down. Your new mortgage will be for $200,000.
Let’s say you’ll pay 3.77% on a 30-year mortgage. The payment for principal and interest will be $928.50. Because banks charge a lower interest rate on 15-year mortgages, that interest rate would likely be 3.23%. Your monthly payment would be $1,403.39, or $474.89 more.
That seems like a lot, coming out of your monthly income, but if you can afford it, it’s worth it for the long term.
- With the 30-year mortgage, you’ll pay a total of $334,260.
- With the 15-year mortgage, you’ll pay a total of $252,610.20
That’s a difference of $81,649.80.
I won’t be there that long, so what does it matter?
It’s true that in today’s mobile society, most people don’t stay in the same home long enough to pay it off. Some reports say the average American moves every 5 years.
So doesn’t it make good sense to keep all the money I can in my pocket?
No, not really. Think about equity.
After 5 years on a 15-year loan, you’ll have paid in $84,203.40 and will still owe $143,752. You’ll have gained $56,248 in equity.
After 5 years on a 30-year loan, you’ll have paid in $55,710. And will still owe $180,214. You’ll have gained only $19,786 in equity.
With the 15-year loan, you’ll have paid in $28,493 more in payments and will have gained $36,462 more in equity.
See how the difference would affect you…
If you’d like to explore the difference between a 15-year and a 30-year mortgage on your new home purchase, call us here at Homewood Mortgage, the Mike Clover Group.
We’ll be glad to get you pre-qualified for a loan, help you decide how much you should pay for a new home, show you the current rates, and give you facts and figures with which to make a sound decision about your mortgage.
Call us today at 800-223-7409