As an example:
Your costs for a $250K fixed rate mortgage 15 year at 4.5% /30 year at 5%
Your monthly payment $1,912 / $1,342
Interest you’ll pay during first five years $49,283 / $60,095
Interest you’ll pay over full term of mortgage $94,247 / $233,139
Go for the 15 year. Start a college fund with the savings. Some belt tightening will pay big benefits. The extra 15 years of no payments will leave plenty of investment opportunity.
This assumes you don’t pay any extra principle. Many do. For example, I paid off the mortgage for my first home in under a year. If you are sure you can afford the payments for a 15 year, then there are a variety of benefits, including a typically lower interest rate. However, there are also benefits to having the option of making lower payments with a 30 year. You can still pay off extra principle and make higher payments when you are able, but if you have an emergency expense, get fired, or have other unforeseen expenses; you have the option to make smaller payments with a 30 year. The best choice varies from person to person.
We refinanced to a 15 year about five years in, not long after we paid off the 10% HELOC that was effectively part of our down payment. That way, we eliminated the higher HELOC interest rate, caught that refi at 2.635%, and the increased 15-year payment was just about exactly the amount of the old HELOC + 30-year payment. Either the payments were still well below the recommended debt ratios. Our rationale was that we wanted to have lots of equity available to tap for college expenses, if necessary.
It was a good strategy to have in hand, esp since I unexpectedly exited the work force (medical issues) while both guys were in college. We didn’t need to tap into the HELOC too much, but having it available (and not having spent equity on house upgrades) smoothed things out and reduced worries during a scary time.
And while I’m at it, I would recommend that your S and DIL buy individual term life policies for a substantial amount while they are young and healthy (i.e., through an insurance company, in addition to any employer-provided coverage). It will help them keep the house or pay for child care/college if G-d forbid something happens to one of them. I doubled my term policy while I was pregnant with S2 at age 31 and am so thankful I did – I became completely uninsurable at age 41, but my policy would have paid for college for both of my sons if something happened to me. I still have that policy. Payments are still very reasonable and since I can’t get coverage anywhere else, I’m reluctant to drop it.
I wouldn’t buy a mortgage insurance policy that pays off the mortgage at death – it’s more expensive than term life, and term gives you flexibility in how you spend the funds.
Our mortgage company gave us a small discount for having payments automatically withdrawn. Well worth it.
if you are buying a new house, get a list of the manufacturer, model and make for everything they installed in the house. in later years when your trying to purchase a replacement, you know where to check first. I got this for the wood floors and carpets, but not for door handles, faucet handles, light shades/coverings, etc.
When they’re deciding who to go with, tell them to get 3 Loan Estimates (today’s equivalent of a Good Faith Estimate) and compare fees given the same rate, lock period, and loan type.
I did not read all the other responses. Forgive me for whatever is redundant.
I currently own three homes, and have purchased and refinanced many times.Here are my two cents:
All quotes are negotiable. Drill that into their heads. I have negotiated down the rate and/or fees on every loan I’ve ever gotten.
It’s MUCH easier to compare apples to apples if all their quotes are for 0 fee loans (not 0 cost). In that case they only thing they need to compare is the rates. Have them check the APR. On a 0 fee loan quote, if the APR is not the same as the advertised rates, then there are hidden fees somewhere.
Title insurance, appraisal, inspections and prepaid insurance and taxes are not fees. Those expenses are roughly the same from company to company.
They should buy as much house as they can comfortably afford for their first home (meaning they can still sock away some money in retirement and emergency funds every month, but they might have to eat macaroni and cheese and watch library movies the first couple of years). Those payments will seem much easier in a couple of years AND they are more likely to stay in that first home longer if it is better and nicer than a cheaper home now. In the long run, the longer they stay in their first home, the more money they will save.
They can choose to pay a slightly higher interest rate in order to get a credit at closing that will cover some of their 3rd party expenses and prepaids. You have to do the math, but in my experience, that has always made more sense. The break even point is usually 4-7 years AND they get to keep more of their cash invested now(or they’ll need less down).
If they are putting down less than 20%, under no circumstances should they get an FHA loan. The difference in the rates are negligible at best, BUT with an FHA loan you have to pay the mortgage insurance for the life of the loan. With a conventional loan you can get out of the mortgage insurance once you have 20 to 25% equity in the home.
For the past 10 years or so, I’ve always gotten much better deals from a lender I found on bankrate or zillow (or last year, on Costco), than from a local lender. Do not let a local lender convince them that the service will be much better. As long as the lender has a lot of good reviews, and they have all their documentation in order, they will be fine. They just need to get through the loan process. After that, “service” is a non issue. They’ll make their payments by automatic draft and will likely never deal with the lender gain. Also, there is probably about a 75% chance their original loan will be sold to a different lender or service within the first couple of months after closing anyway.
7)Once they apply for the loan and sign a rate lock agreement, and start getting documents from the lender, they need to compare line by line every number in those documents. Many times, I have caught mistakes that were never in my favor.
This next piece of advice only applies to disciplined home buyers: IF they are easily tempted or flaky don’t share it. If they are pretty certain they will stay in their house less than 7 years, they are probably much better off getting a lower rate with an adjustable rate mortgage that is fixed for 7 years and either 1) investing the mortgage savings every month (preferable) or 2) making the same payment they would have paid with the fixed rates loan (thereby building up equity faster). In addition to saving or building up equity faster, they are also giving themselves the option of a smaller loan payment in the event of a real life emergency.
Do they have substantial deductions? If not, make sure they understand that with the new 24000 standard deduction for married couples, there won’t be any additional savings from interest or property tax deductions. As a young couple they should run from any agent or lender who tries to convince them they can afford a bigger mortgage payment on that basis.
@gouf78 Your scenario doesn’t factor in investing the savings. From a purely math standpoint, the 15 year loan is almost NEVER a more financially advantageous option. Not only do the higher payments significantly increase the potential of a foreclosure, the comparison doesn’t factor in the significant cost of not investing difference in the mortgage payments over 15 years., (OR the potential savings from the additional interest deduction).
In you scenario, the borrowers appear to save $139000 in interest. However, investing the the $570/month difference in at an average 6% return would result in a savings balance of $166000. Also, if they end up in the 25% tax bracket and can deduct an additional 80K in interest (ballparking what they could deduct once we return to a $12000/couple standard deduction), that would save an additional $25000 in taxes.
In this case,the borrowers are $191000 better off getting the 30 year loan.
Sheesh…I have to quit writing from my phone. ^Tax savings is only $20000. Borrowers end up $186000 better off at the end of 15 years.
Even if they immediately start investing the $1912 principal and interest payment from the 15 year loan for the 15 years that would be remaining on the 30 year loan, they won’t catch up on what they could have saved by investing the difference in the two loans.
My advice to D, who is buying a home. “You don’t need a three bedroom-two bathroom home, but buy one anyway”. The resale is much better as that is what most people want.
They met with a loan officer type person today and discussed a bunch of stuff. They learned a lot! Just starting the process and want an idea of what they can afford (not just what the bank/loaners say they can afford!) We talked tonight about looking at a first house as NOT like a first apartment - when you look make sure that this could be a place you could manage to stay for several years if necessary and to definitely think of it as a minimum of 5-7 year place to live (pending any city relocation).
Until S if/when decides to make the next step in his education career to administration (he’s a 4th year teacher now) their income is going to stay moderate. So we are not talking about mansions or socking away lots of money or the possibility of 15 year loans.
Our role is to assist them then in the process, guide when they ask for guidance (which they usually do) but ultimately the decisions are theirs to make. They were encouraged about their talk with the loan officer today.
This isn’t correct. If your equity (usually the down payment, but can also be that you got a good deal and the house comes with equity after the appraisal) is less than 20% you have to pay PMI. After 5 years, you can request the PMI to be cancelled if the equity is by then over 20%. It might require a new appraisal. You can also get it dropped by refinancing within the 5 years but that will require a new appraisal and the refinancing costs may not be worth it. Within the first 5 years, the bank cannot just drop the PMI like it used to be able to. Refinancing is required.
Not allowed by the Dodd-Frank act. If the equity is under 20%, the PMI is required if the loan is to be sold. Almost ALL loans are sold and securitized. There may be a program like the Ohio Heros that holds those loans for 30 years, but I really, really doubt it. They’d have to have a massive amount of money to lend out to do that.
Not allowed for loans that are to be securitized. See Dodd-Frank act.
Son purchased first house a month ago (sold condo they owned)
-negotiated with several mortgage companies-
he would secure one rate / points/ closing costs and ask a competitor to beat the deal and they did - back and forth many times.!
-don't be timid in comparison shopping for mortgage rates
PM me if you'd like further details, he's a project manager so he was very thorough
I like a 30 year mortgage to start because they can always make additional principal payments when times are good but they aren’t locked into a higher payment. . For a while, I had a measly extra $50/month go toward paying the house off early. It all helps. And rates are still low now. Make sure they discuss how they would make the payment if one of the incomes is not there or is reduced.
It is useful to consider how people lose their homes: fire/hazard, flood, loss of income, over-leverage compared to income, over -everage in a housing bubble.
In my old job, we heard from people who bought reasonable houses and kept taking out HELOC/equity loans against the equity as the value increased in a housing bubble. (Their income was not changing .) They either over-improved the homes or spent the money on “experiences” or keeping up with the Joneses. If either group had to sell to chase the job market, they would get nothing because the home would not sell for enough to cover what they owed. It was terrible for them.
Thought I’d share that S and DIL just closed on their first home, the subject of this thread!
Very happy for them! They were able to get a special “community mortgage” loan through a reputable lender with fixed interest rate, NO PMI and low down payment. S did have to do a pre-purchase homebuyer education workshop. I kind of thought that was a great idea for ALL first time home buyes!
The bank was NOT very speedy and there were several hoops to jump. Closing had to be delayed a couple days due to bank seeming to drag progress and truly, until NOW they have been hesitant to believe it would actually happen - a “I’ll believe it when I have the keys in hand” according to S!
The low down payment and no PMI allowed them to boost their budget a bit and have landed with a home that if they want, can probably be their home for several years even if/when they decide to have children.
They had a final walk through an hour before closing - can’t wait to hear how that went. Just SO happy to see this step for them.
Thank you for all the bits of advice here - some of it truly came in handy for me to understand and share with them. They SURE got an education!
Also wanted to say, that someone mentioned above that their realtor was able to provide all the info needed to buy a house. Let me tell you, the realtor they ended up with (after an initial dud or two) was worth her weight in GOLD. She was so excellent about advising them and having their best interest at heart. As she said, “if I don’t do a good job for you and earn your respect, you’re not going to recommend me to others” - if they walked in a house with structural issues in her view, the tour was over - “this house is a money trap and more than you need to handle in a first home”.
My H and I really appreciated her. She taught us all a lot and also came to know my S and DIL in a professional personal way.
Abasket - so glad to hear that the kiddos got a good realtor. We are experienced home buyers, but we really appreciated the work our realtor did for us. He babysat sewer scope inspection, handled a very hissy-pissy sellers’ agent who realized that she did not bargain hard enough, and so on. A good realtor is worth her (or his) weight in gold.