Financial Wellness - Simplifying Home Buying

Wela_15vs30year_Mortgage_comparison_Illustration_2SIMPLE1-01 (1)  

  • Pay Every Two Weeks
    • Paying down your mortgage can be overwhelming. A typical 30 year mortgage means 360 payments over the life of the loan...that’s almost a mortgage payment every day for an entire year! Most of us can’t even wrap our minds around the amount of interest that we’ll pay on that mortgage over the 30 years and since I don’t want this post to be depressing we won’t dig too deep on that front. So one idea to make this pill a little easier to swallow is to pay your mortgage every two weeks. Over the course of the year, you’ll have made an extra payment (which helps pay down the principal) and it shouldn’t have impacted your cash flow all that much! So take a $1,500 mortgage for example: Rather than pay $1,500 on the 5th of the month (or whenever the payment is due) you’d pay $750 on the first of the month and two weeks later, another $750. Two weeks after that, $750. You’ll end up with 26 payments of $750 for a total of  $19,500 vs 12 payments of $1,500 for a total of $18,000.

 

  • 30 Year vs. 15 Year
    • The age old adage of a 15 year mortgage being cheaper than a 30 is mathematically true. But it may not be the best route to go for your family from a cash flow standpoint. One reason it’s true is due to the shorter amortization period. This means higher payments and thus the principal gets paid down quicker. But that higher payment may impact other important areas of your life, like retirement savings, which needs to be prioritized...you know you can’t buy groceries with shingles! So paying off your mortgage is great, and we like to see it paid down by retirement, but it needs to be done in conjunction with retirement savings. So, one idea we share with clients is to take out a 30 year mortgage but pay it like a 15 year mortgage. This allows you the flexibility to drop back to the 30 year payment when necessary. For example, a 30 year, $250,000 mortgage at 4.5% is $1,266 each month while the 15 year mortgage payment is $1,912, a difference of almost $650. When you pay the 30 year like a 15 year, you’re essentially paying $650 extra towards principal each month. However, when life happens or you don’t get the raise at work you were expecting, well, you’re only on the hook for $1,266 so you can drop back to the lower payment.