I had to write this post because I am excited. We are rather young, and have our first home. In February we got a promotion and decided we would put all the extra income toward the future. Some will go into investments but first we decided to put some extra toward our mortgage. So for the last 2 months we paid an extra $350 towards principle. First off, I have to say, we owe less than $74K on the house! Yay! Second, I went and looked at our amoritization schedule…and our contractual term is 28 years 10 month, but our actual remaining term is 27 years 10 months. I had to be excited. (Granted we have a rather inexpensive home, but as a 1 Income family, this is awesome)
Now when you buy a house, there are a lot of rules now that weren’t there a year ago. First, you have to have great credit. Second, you have to find a home that the bank is willing to lend for, or have a lot of extra money to invest in a home. This means, if you have great credit, and cash, you can find some great deals on houses right now. But, its not the end of the world if you have to get a loan. In fact, I would say its better to get a home loan than to put your life savings into a house, you don’t want to risk not being able to retire in the name of owning your house outright.
I will not discuss Adjustable Rate Mortgages as I never thought they were a good thing. You see, adjustable rate mortgages would only be a wise decision if you move every 3 years and never reach that 5 year mark when interest rates increase. There are many people in bad places now because they got an ARM and have lost their job, or don’t have the equity to refinance to a fixed rate mortgage thanks to the housing bubble popping.
Now there are three different length options for fixed rate mortgages. You can get a mortgage for 15, 20 or 30 years. (There are other options but these are the most common out there.)
The 15 year mortgage. Benefits:
1. You don’t pay as much interest. Think of it like this, a mortgage that is 15 years long will pay half as much interest as a 30 year mortgage.
2. You gain equity quickly. If you are going to be in your home for only 7-10 years you will have a LOT more equity when it comes time to buy another home.
3. You can retire on time. This is an important benefit for the older generations that are looking forward to retirement at 62 or 65. (Lucky me, I can postpone retirement until I am 72 if I want to get mroe social security benefits.) So if you are in your late 40s or older and buying a home you plan on living in after retirement, a 15 year mortgage might be just what you want.
Things to ask yourself:
1. If you lose your job, can you afford to make the payment? If you know you cannot afford the payment on ine income, you should have 3-6 months worth of living expenses saved up. This will ensure that if something happens down the line you can still make your payment.
2. Am I still saving towards retirement? This is important not only for the people planing on retiring in 10 years, but the younger generation as well. A 15 year mortgage means you are commiting several hundred more dollars a month toward your home, will you still have money to put toward your retirement? (note: if you don’t getting a 15 year mortgage won’t help you retire on time)
3. How much will it cost to refinance? Things happen, and sometimes people refinance not because rates get lower, but because they need a lower payment. If you can’t keep up on the larger payment you need to remember it will cost easily $2000 to refinance your home.
Next time: the 30 year mortgage!