30 year mortgage vs 15 year mortgage for young first time home buyers?

by klsklsk

The best advice is to run the numbers and look at mortgage amortization calculator/tables.

The difference in interest rate is really what will tip this one way or the other. If its the same interest rate, you 100% take the 30 year and pay it quicker. This costs you nothing but gives you the flexibility of decreasing your payments if something happens and you cant afford the higher monthly payment.

Now, for some real world examples on $200,000 mortgage

-A 15 year loan at 4.375% will give you a monthly payment of $1517.

-A 30 year loan at 4.875% gill give you a monthly payment of $1058

-A 15 year loan at 4.875% will give you a monthly payment of $1568.

So at this 1/2% higher rate, you lower your minimum monthly payment by $459 a month going 30 years. Thats $5500 a year, which could come in handy if suddenly your cashflow becomes a problem.

However, in order to still pay it off in 15 years, you’d have to pay $1568 per month, or $51 more than if you took the 15 year loan. Or if you get the 30 year loan and make the $1517 payment from the lower rate 15 year loan you would take approximately 15 years and 8 months to pay off the loan.

So you have to run the numbers like this and look at what makes sense for you. As a 33 year old who bought his first house at 23 and then moved at 29 and bought a different one, this is is ny advice:

-First, think about if a house really makes sense right now. You are both recent college grads- what do your jobs look like? The flexibility to move around and be able to more easily expand your job search in the first 10 years of your careers could be worth far more than any equity you may want to build with a home purchase now. If you know you will be staying in this area long term and have landed good jobs, it may make more sense. If you are both engineers or in a highly desireable field and could see moving for a higher salary in a couple years, hold off on the house.

-How long have you been together? Or living together? If only 2-3 years Id wait until you are married to buy the house. You never know what happens and there are always a ton of wedding expenses you don’t expect.

-if you are sure you will want a larger house in 5 years, consider renting and saving extra until you can just afford the larger house. What does rent cost? Consider 2 scenarios:

1) $1200/month rent + Saving $350 month in 2.2% interest savings account ($1550 total per month) Also start the savings account with $6000 in closing costs you would’ve otherwise spent on first house.

or

2) 30 year loan at $1050/month + $300/month property taxes + $200/month misc house expense ($1550 total per month)

After 5 years in option 1 and renting you will have saved $28,895 to put towards the nicer house.

In option 2 you will have built only $17,000 in equity in your house, and have additional closing costs from selling it. Look at these numbers and what your property taxes will be, it may make more financial sense to just save and wait.

-Alright so we’ve gotten through that and you’re sure you want to buy a house. Get the 30 year loan. Even if you think youre secure in your jobs, you are young and you never know. The flexibility is worth the extra payment in my scenario. Do NOT let taking a 30 year loan convince you to buy a more expensive house than you would have on the 15 year loan then. The whole point is getting flexibility, if you buy a more expensive house you lose that flexibility.

Edit: I forgot to add in my rent vs buy scenarios a section about the house appreciating or depreciating. 5 years is a short time to think your house is guaranteed to go up in value. Considering we’ve had a bull run on housing prices in the last 5 years, it is quite possible that your house you buy now goes down in value over the next 5 years. Its also possible the bull run continues and it goes up a bunch. What this could mean is that you end up with way more equity than renting, or you could even be negative and in 5 years you cant afford that dream house because you are upside down. Just something to consider.