Being a first time home buyer is an emotional decision. You plan on being in this home for the rest of your life (everybody says that) and starting a family or maybe your single and just want your own place.
You have researched homes and found one in your budget that suits your needs. Now you need to set up your financing.
It does not matter how much you have for a down payment but let’s assume you did yourself a solid and saved up enough to put a 20% down payment to avoid private mortgage insurance (PMI). Congrats.
And lets assume you already called a mortgage company and went through the pre-approval process where they verified your W2’s and bank statements.
Your realtor submits an offer which gets accepted. Its time to set up a closing. But right before you choose a closing date your mortgage banker tells you the 15 year mortgage interest rate is 1% lower than the 30 year you were approved on.
And since we are all conditioned to want the lowest rate you strongly consider it. I’ll do myself to explain why you, the first time home buyer, should stick with the 30 year fixed rate mortgage.
As an example:
30 Year Payment at 5% = $805
15 Year Payment at 4% = $1109
$1109 – $805 = $304 less a month with the 30 year.
Retirement Accounts – Are you fully funding your 401k, IRA, and Roth IRA? No. Than you definitely have to get the 30 year fixed rate mortgage. Put the extra $304 a month into those accounts and let the compound interest work for you.
If you can fully fund your retirement accounts it’s still a no because…
Home Improvements – Unless you are buying a new construction home you will be updating the house. It’s not a matter of if, it’s a matter of when. It would be best to pay for those in cash instead of going into debt. Home improvements cost way more than $304 but every little bit helps. A new kitchen is $15k to $30k. Bathrooms are $10k to $30k.
Repairs – These are different from home improvements. And if you bought an older home you will have to fix something. Its inevitable. Roofs on a 1500 sq ft home cost $10k. That $304 would look nice now.
Because Houses – You do not understand how much money goes into a house until you buy your first one. You are familiar with paying utility bills in an apartment but your house is twice as large which means double the cost to heat and cool it.
And with a house double the size it means you have to buy double the amount of furniture. You can’t leave rooms empty. All of these add up quickly.
Babies – If you are a first time home buyer than there is a strong chance you are in your twenties or thirties and probably don’t have kids yet. Maybe your first child is on the way and it’s why your buying the house. You do not understand how expensive babies are until you have one.
You’ve heard parents talk about the costs of diapers, formula, clothes, and the biggest one – daycare. The stories are true. Daycare for one kid costs around $1000 a month. Would the extra $304 you’re not paying towards the house help you towards paying for daycare now?
I don’t care if you are single and buying your first house. We all know how fast our lives can change. Maybe you’ll meet someone in the next year, they move in, and then you’re planning your futures together. You have the 30 year fixed rate mortgage with a low payment allowing you some control over where you want the additional money to go.
New Job – With you being young there is a chance a better job comes up forcing you to move. What if you can’t sell the home? You could always rent it. And with the lower payment you might be able to cover the mortgage payment, property taxes, and home owners insurance.
Lost Your Job – Maybe your employer goes out of business nine months after you bought the house. Since you put all of your savings into the downpayment there isn’t much left over to get you through the job search. Wouldn’t it be nice to have the $805 payment versus the $1109?
And Stay In It
Keep the 30 year mortgage for as long as you own the house. The only reason you should want to refinance out of that loan is if interest rates on 30 year loans are now lower that the one you have.
If you have been maxing out your retirement accounts, there are no more home improvements, and there are no babies in the future or you have adjusted to your kids new costs than go ahead and bring some money to closing to pay down the balance.
But take another 30 year mortgage. Why? Because you never know.
You do not understand how expensive homes really are until you own one. If you are buying your first home you should heavily consider getting a 30 year fixed rate mortgage. Consider the 20% down payment in this scenario your “win”.
But as soon as you get into the home you will see the value in having those couple extra hundred dollars in your hands.