Terry's Tip: Avoid a 30-Year Mortgage

Through teaching my “How to Win with YOUR Money” financial wellness course, I have encountered several individuals looking to buy their first home. When I am asked for advice on how to attack this goal, my answer is generally the same: Save at least 20% for a down payment and buy the home on a 15-year mortgage. This of course would be after you are free of all consumer debt and have built an emergency fund of at least three months household income.

(Ducking as objects are getting thrown at me) “BUT HOW IS THAT POSSIBLE??? HAVE YOU SEEN HOW MUCH HOMES COST? I’LL NEVER BE ABLE TO BUY A HOME!!!”

Yes, you will! But you probably don’t want to finish paying off your home when you are 66 years old (According to cbsnews.com, the average age of a first-time homebuyer as of November 2022 is 36). As your income will go down once you retire, do you really want to still be making a mortgage payment when you should be enjoying your money? Do you want to spend the rest of your working lifetime paying off a home when you could be expanding your retirement nest egg?

Aside from just the age and time factors, let’s look at how much more money you would actually pay if you decide to go with a 30-year mortgage with a small down payment, compared to a 15-year note with more money down. Note: Most numbers used in this example will reflect average prices in Florida, where Terry Finance Coaching is based.

-Current average cost of a home in Florida (Zillow): $383,063

-Current 30-year mortgage average interest rate in Florida (Zillow): 6.21%

-Current 15-year mortgage average interest rate in Florida (Zillow): 5.38%

-Average cost of one year’s homeowner’s insurance in Florida (Money Geek): $2,048

-Median Florida Property Tax (Tax-rate.org): 0.97%

Purchase Strategy #1: 30-year loan with 5% down payment

Wow! You may think on the surface "I'm saving money because my rent is more than $2,231 a month!" In reality, this deal would cost you over ONE MILLION DOLLARS over the life of paying the house off.

You may have noticed an additional figure of PMI. This stands for Private Mortgage Insurance, which in many cases is added to the cost of any home with a down payment of less than 20%. According to the Consumer Financial Protection Bureau, PMI protects the lender (not you) if you stop making payments on your loan. In other words, the bank is leery of the fact that you put so little down on the home, they want to protect themselves if you realize you bit off more than you can chew.

The interest paid on this 30-year mortgage ($439,321.04) would be over $50,000 more than the original price of the home. This is not how you win with your money.

Purchase Strategy #2: 15-year loan with 20% down payment

"But the monthly payment is higher!!!"

Yes, but not by much (about $250), and we avoided PMI by putting 20% down. I know that it could take years to save up the kind of down payment ($76,612.60) needed in this scenario. However, looking at the estimated total cost of this home, it adds up to almost HALF A MILLION DOLLARS LESS than the exact same house we bought on a 30-year loan.

It can take years to recover from the emotional and financial damage done by a foreclosure. Buying a home when you are truly under a solid monetary foundation will allow the largest purchase of your life to be a blessing, rather than a curse. As this article has demonstrated, buying a home on a 15-year mortgage with a down payment of at least 20% would save you hundreds of thousands of dollars over the pay-off term, when compared to a 30-year mortgage with a small down payment. We have not even covered expenses such as HOA fees, repairs or replacements, general maintenance, etc. In other words, try not to feel if you are currently renting that you are doing something wrong or throwing your money away. Keep your eye on the prize, don’t try to keep up with the Joneses, and save, save, save!