How to Save Money When Buying a Home

Posted by brainjmedia03 on Tuesday, January 12, 2016

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When buying a home, obviously what mortgage you apply for makes a huge difference regarding monthly payments, and the duration that payments will last. While a 30-year fixed-rate loan is most common, it might be worth it for you to consider the benefits of applying for a 15-year mortgage. Here you can see the numbers behind a 15-year mortgage: 

Reasons to consider a 15-year mortgage
There are several benefits to using a 15-year mortgage, including…

Lower interest rate: 15-year mortgage interest rates are significantly lower than what you can get for a 30-year. As of this writing, the national average rate for a 15-year mortgage was 3.24%, well below the 4.01% you can expect from a 30-year loan.

Less interest: Not only is the interest rate lower on a 15-year mortgage, but the faster amortization schedule means you’ll pay a lot less interest over time than you would on a 30-year. Based on today’s interest rates, here’s the difference it would make on a $200,000 loan.

Build equity faster: Because more of your payment goes toward the principal, a 15-year mortgage allows you to quickly build equity in your home. At the current mortgage rates, just 30% of your first payment on a 30-year loan is applied toward the principal, with the other 70% going toward interest. However, 62% of your first payment on a 15-year loan is principal repayment. And the difference gets even wider as time goes on.

Drawbacks to keep in mind
The most obvious drawback is that your monthly payment on a 15-year mortgage will be higher than a 30-year mortgage payment on the same home. If you buy a home and obtain a $200,000 mortgage, you can expect to pay about $450 more per month on a 15-year mortgage than a 30-year.

Another drawback is the amount of “house” you can afford to buy. Using the standard rule that your mortgage payment shouldn’t be more than 28% of your total income, a family with annual household income of $75,000 could get approved for a mortgage payment of $1,750 per month, as long as their other debts weren’t excessive. With a 30-year mortgage, this means that you could afford to buy a home worth approximately $341,000, assuming the national average cost of property taxes and insurance, and a 20% down payment. If you choose a 15-year mortgage, your affordability drops to $236,000.

While I never advocate buying a house at the top of your budget unless it’s absolutely necessary, the affordability issue should be taken into consideration. However, if you can afford a house that meets your needs while using a 15-year mortgage, it’s worth looking into.

The numbers speak for themselves
Let’s say you’re in the market for your first home, and you decide on a house that costs $150,000. With a 20% down payment, this means you’ll need to obtain a mortgage for $120,000.

A standard 30-year mortgage would result in a $573.59 monthly payment for principal and interest, and over the life of the loan, you’ll end up paying $206,492 — $86,492 in interest. On the other hand, while a 15-year mortgage would result in a higher $842.62 payment, your total interest cost would plunge to just $31,671.

In other words, while your monthly payment would be 47% higher, you’ll pay off your house twice as fast and pay 63% less interest.

If you can afford it, it’s definitely worth considering
On a personal note, when my wife and I bought our first home a few years ago, we decided to buy a house that was well within our financial comfort zone and finance it with a 15-year mortgage, a decision that served us well. Because of the accelerated principal repayment, after just a few years, we had built up enough equity that we were in a position to sell the home and put a down payment on our “forever” house.

I highly recommend 15-year mortgages for younger buyers in particular, as it is a smart way to build equity at a time in your life when it’s extremely important to make wise financial decisions. Limiting your home search to what you can afford with a 15-year mortgage may seem like a sacrifice in the meantime, and it is, but it is a sacrifice that can pay off tremendously in the long run.

The $15,978 Social Security bonus most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. In fact, one MarketWatch reporter argues that if more Americans knew about this, the government would have to shell out an extra $10 billion annually. For example: one easy, 17-minute trick could pay you as much as $15,978 more… each year! Once you learn how to take advantage of all these loopholes, we think you could retire confidently with the peace of mind we’re all after

If you are looking into buying a home, Stonebridge Mortgage Group is here to help you.  Contact us at 503. 611. 5580, or look more into the services we offer here

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