The U.S. government may finally understand that 30-year mortgages are a bad deal. Fannie Mae and Freddie Mac, the government entities that guarantee 90% of U.S. mortgages, are losing taxpayer money hand over fist thanks to massive homeowner default rates.
So the Obama administration proposed eliminating federal guarantees for home loans except for borrowers who can't qualify for a mortgage with a private lender. Without that federal backing, banks will shoulder more of the risk, driving up the cost of mortgages through tighter credit requirements, larger down payments and higher interest rates. The 30-year mortgage won't seem so attractive with those features, will it?
Actually, the 30-year mortgage was always a bad idea. It simply enabled borrowers to buy more house than they could afford by spreading the payments out over a longer term. On top of that, those homeowners paid tens—even hundreds of thousands of dollars more in interest.
That's why Dave never recommends 30-year mortgages. If you don't pay cash for your home, get a 15-year mortgage with at least a 10% down payment and monthly payments that are no more than 25% of your take-home pay.
The difference between a 15- and 30-year mortgage with a 6% interest rate on a $225,000 home is $144,000 over the life of the loan. What could you do with $144,000? Pay for your kids' college? Buy a car? Buy another house?
What if you invested that $144,000? Invested as a lump sum, it would grow to a million dollars in just 17 years. You'd have $2.5 million in 25 years. On the other hand, what if you invested your house payment for 15 years after you paid off your 15-year mortgage? One year later, you'd have a million bucks. Ten years later, you'd have $3.5 million.
Are you ready to give up the opportunity to be a millionaire just to buy a home you can't really afford in the first place? Didn't think so.
That's why you have to shop for homes with your head—not just your heart. Too many homeowners fall in love with a home they just have to have, no matter the cost. But if you know buying that home could cost you the chance to be a millionaire, it's much less attractive.
If you're in the market to buy or sell a home, contact one of Dave's real estate Endorsed Local Providers (ELPs). Your ELP is an expert in your market and will give you the same great advice Dave would. Get in touch with your ELP today!
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