I recently had reader ask why we chose a 30 year mortgage on our 2nd home, when we chose a 15 year on our first.
After blogging about our first house and choosing a home that you could afford the payments on a 15 year mortgage, we said one thing and did another. Here is our post on considering a 15 year mortgage when looking at how much you should spend on a home.
Let me start by saying, we did weigh the option of a 30 year or 15 year mortgage very seriously. Here is why we chose a 30 year mortgage this time. At the time of obtaining our mortgage, we were still figuring out what our long-term goal situation would look like. We had been a single income family for about 10 months, new parents, and we were (and are) still looking at what our long term plans are for photography which is meaningful income stream.
What are the benefits of a 15 year mortgage? Usually you get a lower rate with a 15 year compared to a 30 year. However, the primary benefit of a 15 year is that you will have your mortgage paid off in half the time, which means saving literally hundreds of thousands of dollars in interest.
So why did we decide to take out a 30 year mortgage rather than a 15 year? Well I will get to that in just a minute. What I will say is we decided to take out a 30 year mortgage but with the intent to PRETEND we had a 15 year mortgage. That way we would reap the biggest benefit of a 15 year mortgage (15 less years of interest payments, and saving hundreds of thousands of dollars in interest) without the biggest drawback to a 15 year mortgage...a MANDATORY larger mortgage payment. Instead we are doing a voluntary larger mortgage payment. Here were the things we considered:
Security- This was huge for us. As a household relying on the income of just 1 spouse, it made me pretty nervous to commit to a larger mortgage payment if something happened and I could no longer work.
Savings- Because of the above, we would be committing to holding a much larger emergency fund to cover closer to 8 months of our emergency expenses, rather than 4-6 months. We would need more savings in order to help regain some of that security. The money in savings would be money otherwise going towards our mortgage, and we would rather use it to pay down debt then sit there earning a very low interest rate.
Current Situation- Our small business of photography, which brings extra money to help with our expenses is wonderful, but takes up a lot of time I would otherwise spend with Lorelai. I don't want to feel forced to work two jobs to pay our mortgage, and wanted the flexibility to take clients as my schedule allows. Also, we still want the ability to travel a little (on a budget of course). We still plan to really attack our mortgage, but attacking it with extra payments is so much more fun then being stuck with just trying to make the minimum because the minimum is so large.
Plans for the future- Umm....we don't have them. We know we want to stay in the home long-term, which means staying in Omaha. I plan to stay at my current employer until I retire (because I absolutely love my job), but other than that, we really don't know. I don't know if we want more kids, if Kevin will ever go back to work, if we will stop photography...all things that will affect our financial situation likely in the next 1-5 years. It would be much easier to make the jump to a 15 year mortgage if we knew for sure we weren't having any other children or if we had a date for when Kevin may start working outside the home again.
Future Mortgage Payment Increase. For me, the thing that tipped the scale to a 30 year rather than a 15 year mortgage, was that I knew our house is under valued for taxes by a significant amount due to a lot of new builds in our area. In our area, we have high property taxes as compared to other areas of the country. (If you look at the property tax percentage map I pulled from CNN, we live in that little dark area there stating we have high percentage property taxes). I had to consider that our mortgage payment, although very manageable now would likely increase by $200-400 over the next 2-5 years once things catch up. Even looking ahead one year, our mortgage increased over $100 a month because of the tax increase, and we expect taxes to go from $4,500 to $7,300 annually in the next few years (already they've gone up over $1,000 a year since we purchased the home) and that isn't even considering an increase in the housing market overall, rather just a correction for our current neighborhood. This is somewhat unique to our home, but something every homeowner should consider...if they expect their house to go up in value, or insurance costs to rise...that all will affect your mortgage payment.
If you are like us, and have some factors that make it difficult for you to commit to a 15 year mortgage, you can still reap 90% of the benefits of a 15 year mortgage while still having the security of a lower mandatory mortgage payment by PRETENDING you have a 15 year mortgage. This is how we were able to compromise. We are making payments as if we had a 15 year mortgage, meaning we are paying above what our 30 year mortgage minimum payments are. Although we have a slightly higher rate than had we committed to the 15 year, we are able to reap the majority of the benefits of the 15 year, saving hundreds of thousands of dollars and having our mortgage paid off prior to Lorelai going to college.
After blogging about our first house and choosing a home that you could afford the payments on a 15 year mortgage, we said one thing and did another. Here is our post on considering a 15 year mortgage when looking at how much you should spend on a home.
Let me start by saying, we did weigh the option of a 30 year or 15 year mortgage very seriously. Here is why we chose a 30 year mortgage this time. At the time of obtaining our mortgage, we were still figuring out what our long-term goal situation would look like. We had been a single income family for about 10 months, new parents, and we were (and are) still looking at what our long term plans are for photography which is meaningful income stream.
What are the benefits of a 15 year mortgage? Usually you get a lower rate with a 15 year compared to a 30 year. However, the primary benefit of a 15 year is that you will have your mortgage paid off in half the time, which means saving literally hundreds of thousands of dollars in interest.
So why did we decide to take out a 30 year mortgage rather than a 15 year? Well I will get to that in just a minute. What I will say is we decided to take out a 30 year mortgage but with the intent to PRETEND we had a 15 year mortgage. That way we would reap the biggest benefit of a 15 year mortgage (15 less years of interest payments, and saving hundreds of thousands of dollars in interest) without the biggest drawback to a 15 year mortgage...a MANDATORY larger mortgage payment. Instead we are doing a voluntary larger mortgage payment. Here were the things we considered:
Security- This was huge for us. As a household relying on the income of just 1 spouse, it made me pretty nervous to commit to a larger mortgage payment if something happened and I could no longer work.
Savings- Because of the above, we would be committing to holding a much larger emergency fund to cover closer to 8 months of our emergency expenses, rather than 4-6 months. We would need more savings in order to help regain some of that security. The money in savings would be money otherwise going towards our mortgage, and we would rather use it to pay down debt then sit there earning a very low interest rate.
Current Situation- Our small business of photography, which brings extra money to help with our expenses is wonderful, but takes up a lot of time I would otherwise spend with Lorelai. I don't want to feel forced to work two jobs to pay our mortgage, and wanted the flexibility to take clients as my schedule allows. Also, we still want the ability to travel a little (on a budget of course). We still plan to really attack our mortgage, but attacking it with extra payments is so much more fun then being stuck with just trying to make the minimum because the minimum is so large.
Plans for the future- Umm....we don't have them. We know we want to stay in the home long-term, which means staying in Omaha. I plan to stay at my current employer until I retire (because I absolutely love my job), but other than that, we really don't know. I don't know if we want more kids, if Kevin will ever go back to work, if we will stop photography...all things that will affect our financial situation likely in the next 1-5 years. It would be much easier to make the jump to a 15 year mortgage if we knew for sure we weren't having any other children or if we had a date for when Kevin may start working outside the home again.
Future Mortgage Payment Increase. For me, the thing that tipped the scale to a 30 year rather than a 15 year mortgage, was that I knew our house is under valued for taxes by a significant amount due to a lot of new builds in our area. In our area, we have high property taxes as compared to other areas of the country. (If you look at the property tax percentage map I pulled from CNN, we live in that little dark area there stating we have high percentage property taxes). I had to consider that our mortgage payment, although very manageable now would likely increase by $200-400 over the next 2-5 years once things catch up. Even looking ahead one year, our mortgage increased over $100 a month because of the tax increase, and we expect taxes to go from $4,500 to $7,300 annually in the next few years (already they've gone up over $1,000 a year since we purchased the home) and that isn't even considering an increase in the housing market overall, rather just a correction for our current neighborhood. This is somewhat unique to our home, but something every homeowner should consider...if they expect their house to go up in value, or insurance costs to rise...that all will affect your mortgage payment.
If you are like us, and have some factors that make it difficult for you to commit to a 15 year mortgage, you can still reap 90% of the benefits of a 15 year mortgage while still having the security of a lower mandatory mortgage payment by PRETENDING you have a 15 year mortgage. This is how we were able to compromise. We are making payments as if we had a 15 year mortgage, meaning we are paying above what our 30 year mortgage minimum payments are. Although we have a slightly higher rate than had we committed to the 15 year, we are able to reap the majority of the benefits of the 15 year, saving hundreds of thousands of dollars and having our mortgage paid off prior to Lorelai going to college.
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