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This is Why I Hate 15 Year Mortgages and Think They Are Risky

Judy

“Dear Steve,

I have 90,000 in credit card debt, I currently have a 15 yr mortgage which has 11 years left payment 1413.00 per month, I also have a second mortgage at 40,000 paying 485.00 per month with 11 years left my current take home is 3,800 per month. I’m in trouble. I’m receiving help from friends and family at the moment but that’s going to end soon.

What can I do to get out of this mess before i miss any payments . I do not want to loose my home.

Judy”

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The Answer

 

Dear Judy,

This is one of those things that just makes me crazy when financial experts like Dave Ramsey tell people to only get 15 year mortgages. I think that is absolutely horrible advice and your situation is a good example why.

A few years ago you got two mortgages and both with a 15 year term. That meant that you were locked into a higher monthly payment for the life of the loan than compared to a 30 year mortgage payment.

Sure, a 30 year mortgage winds up costing you a lot more in interest if you make only the minimum payment each month. There is nothing preventing you from paying it off at the 15 year rate and have lower payment to fall back on if you found yourself in a tight situation.

Some financial pundits say the reason they want you to get a 15 year mortgage is to force you to pay off the loan early. That advice also helps you to lose the home early also.

Let’s Look at An Example

Generally a 15 year fixed rate loan is at a lower interest rate than a 30 year fixed rate loan. As I’m writing this the current rates for each type of loan are reflected below along with the corresponding principal and interest monthly payments.

$250,000 @ 5.45% 30 yr = monthly payment of $1,411.64
$250,000 @ 4.97% 15 yr = monthly payment of $1,973.08

If you get a 30 year fixed mortgage you could automatically send in $1,973.08 and pay off your mortgage in 15 years and 10 months. However, if you just made your first mortgage payment on the day your loan closed you’d wind up paying off your loan three months earlier.

So what can we call that extra few months you’d have to pay over 15 years to pay off the loan at the 30 year rate? Let’s call that the “Shit Happens” insurance policy. That’s insurance you don’t have right now. You’re locked into a 15 year mortgage and outside of refinancing it, you are stuck.

If you had that 30 year mortgage but paying it back at 15 year rates, you could have reduced your monthly payment by $561.44 per month without negatively impacting your credit or mortgage.

If your credit is okay right now, looking for a refinancing opportunity for your loans, as long as you are under 80% loan to value, is a reasonable idea.

If you are underwater on the home loan and the house is worth less than the amount of your mortgages, then you might want to read My Mortgage Left Chicago on a Train at 9 AM Going 52 MPH. – Rick

If there is no reasonable expectation that you will be able to afford your mortgage and you are not willing to go and talk to a bankruptcy attorney regarding a Chapter 13 bankruptcy, you should stop taking money from family and friends. They are giving you this money out of the kindness of their heart but it is prolonging a bad situation and throwing their money down the drain, not repairing the situation.

Big Hug!

This is Why I Hate 15 Year Mortgages and Think They Are Risky
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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • http://www.fiscalgeek.com Paul @ FiscalGeek

    I fail to see how they are any more risky if you get an appropriate loan. If you are already underwater going into a home purchase you’re going to be in trouble regardless of the term. Spreading it out longer means you’re going to pay even more money over the life of the home. If your mortgage payments are over 50% of your income then you are in deep trouble no doubt but I don’t think the term of the loan here is the issue.

    Paul @ FiscalGeeks last blog post..Is your printer robbing you blind? Calculate your Electricity Usage with a Kill A Watt

    • http://GetOutOfDebt.org Steve Rhode

      Paul,

      In case of an unexpected expense, the 15 year loan gives you no room to reduce the payment to get past the hurdle, only default. Again, if you get the 30 but pay it off as a 15 you get the additional security in case life jumps up and bites you on the ass.

      Steve

    • Guest

      Everything being equal, if given the choice, I would choose longer amortization.  What matter most is the interest rate.  I prefer to have a large amount of capital left over so I can decide where to put it to use.  For shorter amortization, the mortgage payment become equity and you can’t take it out unless you sell the house.  If you can’t make the payment, the bank can foreclose the house.  So I agree with Steve.

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