A reader wants to ditch her rental agreement for a house, but mortgage rates confuse her.
Question: I’m sick of renting and dealing with landlords and loud neighbors. I’ve been saving for a house and now have $9,000 for a down payment. I have a good steady job. I recently paid off my credit cards just like you always talk about. I’m looking for houses and researched how the home-buying process works.
But one thing I can’t figure out: Is it better to do a 30-year mortgage or a 15-mortgage? Everyone I talk to says different things. I know I’ll pay more interest with 30-year mortgage rates, but I’ll have lower payments than a 15-year. What would you do?
— Cassie in Texas
Howard Dvorkin CPA answers…
I can’t answer your questions, Cassie, without posing a few of my own…
1. On a 15-year mortgage, will your monthly payments total no more than 28 percent of your monthly income? That’s what my friends at Bankrate suggest, although I’d prefer you keep that number to 25 percent.
2. Do you have any other big debts you’re paying off? For example, do you have a big auto loan? If so, that interest rate is surely much higher than on your mortgage. I’d lean toward the 30-year mortgage until you pay off that car and save some money. (See below.)
3. Do you have an emergency fund? Financial experts differ on this point, but if you don’t have enough money in the bank to cover your monthly expenses for at least a couple months, it makes no sense to save interest on your new house when one bad accident or illness will send you to the poor house.
4. Are you contributing to your retirement? Even if you’re just depositing $25 into a MyRA, it helps. I don’t know how old you are, Cassie, but it makes no sense having your house paid off in 15 years if you’re retiring at the same time with no money to buy food.
Running the numbers
Once you answer those questions, try Debt.com’s Mortgage Payment Calculator. It will graphically show you how much you’ll pay in interest, what your monthly payments will be, and when you’ll pay off the loan.
It can also show you how much you can save by making an extra payment — which is an important consideration. If you settle for the 30-year mortgage but find yourself with extra money at the end of the month, you can always make a mid-month payment.
Also remember: Nothing, not even mortgages, are forever. You can always refinance later if rates are better and you find you can afford to make steeper monthly payments.
If you’re on the cusp and unsure if you can handle this debt on top of your others, call us for a free debt analysis at 1-800-810-0989. If nothing else, our counselors can confirm your decision and help you sleep better at night.
Have a debt question?
Email your question to firstname.lastname@example.org and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.