First Time Home Buyers
Freddie Mac’s Weekly Primary Mortgage Market Survey (PMMS) was released this morning.
As we were talking about last week, we have an unprecedented spread between the 30 Year and 15 Year mortgages. In the past week, the 30 Year held at 4.22%, the 15 Year ticked down 0.05% from 3.44% to 3.39%.
We’re looking at a comparison at $200,000 on a $250,000 home. We’re ignoring closing costs, fees and points as they shouldn’t vary betweent he two loans.
Mortgage Payment
I understand, $438/month difference in payment is a doozy. That’s a lot of extra payment for a first time home buyer. BUT, let’s keep it in context. These rates are pretty low. Home prices are pretty low.
That $200,000 loan is $1,200 on a 30 year fixed in a normal(ish) 6% market. You’re going to pay less in rate and less on a home than 5 years ago.
Total Mortgage Payments
A 30 year fixed on a $200,000 loan will want $353,000 from you over time. The 15 year will want $255,000 over the life of the loan. That entire difference is mortgage interest.
Time Value of Money
The argument against the accelerated payment for a first time home buyer is valid. Are you better served funding college funds, life insurance, or, perhaps most importantly, disability benefits? Possibly.
For the first time home buyers who are buying today, it probably makes more sense than ever to talk to a financial advisor. This combination of low rates and low home prices creates some new options. Does it make sense to use the low rates to increase your buying power? Maybe. Does it make sense to identify a lower-cost home and accelerate the equity prepayment as much as possible? Maybe. Can you find a happy medium of being able to fund your asset accounts and accelerate your mortgage, possibly with a 20 year? Maybe.
There are more maybe’s in today’s market than ever before, but they represent a unique opportunity for first time home buyer loan programs to not only provide inflation protected housing (unlike rent), but still have options to fund both accelerated debt reduction and still fund all of those longer-term asset accounts.
Assumptions
These are the values used in this loan comparison. To update any values, go here
| Comparison Term (Years): | 30 |
| Property Value: | $250,000.00 |
| FICO: | 720 |
| Input | 30 Year | 15 Year |
|---|---|---|
| Loan Type | Conv | Conv |
| Loan Term (Years): | 30 | 15 |
| Loan Amount: | $200,000.00 | $200,000.00 |
| Interest Rate: | 4.220% | 3.390% |
| UFMIP: | 0.00% | 0.00% |
| MI Factor: | 0.00% | 0.00% |
| Closing Costs ($): | $0.00 | $0.00 |
| Closing Costs (%): | 0.00% | 0.00% |
Monthly Analysis
Based on the information provided, this table shows the monthly payments for principal, interest, and mortgage insurance
(if applicable).
| Loan & Payment Summary | 30 Year | 15 Year |
|---|---|---|
| P&I Payment | $980.37 | $1,418.99 |
| Mortgage Insurance | $0.00 | $0.00 |
| Monthly Payment | $980.37 | $1,418.99 |
| Monthly Savings | $438.62 | $0.00 |
| Total Loan Amount: | $200,000.00 | $200,000.00 |
Full Mortgage Analysis
Over the comparison term of 30 years, this table reviews the true cost of the loan over time in a way that monthly payments cannot. We remove the principal portions of payments to isolate the cost of interest, mortgage insurance, and any closing costs to calculate the total cost over time.
| Real Cost Analysis | 30 Year | 15 Year |
|---|---|---|
| Total Payments | $352,933.34 | $510,834.90 |
| Principal Payments | $200,000.00 | $200,000.00 |
| Interest & MI Payments | $152,933.00 | $55,417.00 |
| Remaining Balance | $0.00 | -$0.00 |
| Total Cost | $152,933.00 | $55,417.00 |
| Total Savings | $0.00 | $97,516.00 |
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