You want to buy a house. Well, what is the right way to finance it? Some might say it doesn’t matter, and others are very black and white. I’m of the opinion that there is a most advantageous way, but at the end of the day, if you do what is right for you and you know the benefits or consequences of your decision, who is there to judge you?
Take a minute to look at this image of a spreadsheet where I did some math calculations surrounding the purchase of a $300,000 property. The image looks at four different ways to finance the purchase of the house. First, you have the option of putting down a down payment of 3%, the generally accepted lowest, or 20% down, the lowest to avoid the private mortgage insurance (PMI) fees. Second, the loan length is a 15- or 30-year loan amount. In both examples, I used the average interest rate for a 15- or 30-year property loan based on the given rates published online by a few lenders in the last few days.
I can spend a few hours talking about the math and data here, but let’s focus on two critical lines. The first line to pay attention to is the line "Monthly Payment total," with the lowest being a 30-year loan with 20% down and the highest being a 15-year loan with 3% down. The next line to pay attention to is the line "Total Money given to someone else." This is the amount of money you will give to someone else, either as interest to the lender or as the cost of private mortgage insurance to protect the lender from the possibility of your default.
If you look at the results of this example, you can clearly see the benefits of the sweet spot of applying 20% down on a 15-year loan. This results in the least amount of your money going to someone else. If you can only put 3% down, the best option is still a 15-year loan, but this generates the most expensive monthly payment possible. This might be a red flag. If you can’t afford to save 20% down, then how might you be able to afford the highest monthly payment total?
Looking at this chart, you can see how lenders want you to think you can afford a house at 3% down and a 30-year loan. They can make some serious money from you. Let’s look at one more option that people like to talk about, and that is a 30-year loan with 20% down and then making a double payment. This is a good idea, and it's not completely bad, but if you do the math after paying $1960 a month, slightly more than the 15-year loan, you will pay it off in about the same amount of time as the 15-year loan. However, you will still be paying approximately $25,000 more to the lender in interest, so why not just take the 15-year loan to begin with?
My role in helping you prepare to buy a house is to watch out for you and help you make the right decision, and I will always start with a 15-year loan with 20% down and then alter it with you if we both understand the benefits and cost of our decision to change.