How To Know Whether To Use A 15-Year Mortgage Product

Have you been trying to decide which mortgage product to use on your home purchase but aren't sure which is best? In this video, I'm going to tell you all about the 15-year mortgage product to see if this loan is right for you. We'll hear the real story of how our client Wendy used a 15-year mortgage as the best decision for her situation.

Mortgage Options

If you follow Dave Ramsey or any of these big gurus that say debt is terrible, they always suggest a 15-year mortgage. Why? Because you spend way less in interest than on some of those longer terms like 25 or 30-year mortgages. The government is even considering offering a 40-year mortgage.

Can you imagine getting a 40-year mortgage when you’re 20? You’re not even paying that stinking house off till you’re 60. So to understand your options and pick the best loan, we’re going to talk about the 15-year mortgage product, who can get one, and what kind of product lives on top of that loan term.

Wendy's Story

Wendy was a fantastic client of ours that had been living in her house for several years. She had about 16 and a half years left on her loan with a ton of equity built up, and really wanted to get her house paid off. She was considering a 15-year mortgage product.

The cool thing about Wendy is that she is an everyday hero because she's a veteran. She could look at a conventional loan because she had fantastic credit of 768 credit and had a ton of equity in her property - making her loan to value pretty low. In fact, her property value was $750,000, and she was borrowing approximately $330,000.

Wendy wanted to know whether or not to utilize her VA entitlement benefits. She had heard about conventional loans because her sister was also a loan officer. Unfortunately, her sister couldn’t help her because she wasn’t licensed in the state of Illinois (like we are). We found each other, had a quick powwow, and talked through the situation together as a collective group.

The Cost Analysis

Using our spreadsheets and software, we were able to do a total cost analysis for Wendy. This analyzed the nuts and bolts of the actual cost of the loan, instead of just trying to chase that all-important interest rate. The fact of the matter is that sometimes the interest rate is a liar; you technically have to pay for an interest rate sometimes as a consumer, which people usually don’t realize.

The key takeaway for Wendy as she was refinancing her loan was that she was getting a historically fantastic rate at the time of 4.125%. The conventional loan product that we were analyzing together was a 2.5% interest rate, and the VA loan rate was 2.125%. The FHA loan was the same, coming in at 2.125%. You might be wondering why the conventional loan has a higher interest rate. Quite honestly, it’s because the government backs VA and FHA loans.

They charge an upfront financing fee to utilize that loan. This makes the upfront cost a little bit more expensive with that interest rate. The government is going to get some front-loaded cash, but they’re going to offset that with a slightly lower interest rate.

Monthly Payments

A few of the metrics that most of our clients like to analyze include the difference between monthly payments. All of us want to have some sort of housing budget that we can achieve and still live our lives. We still want to be able to invest, we still want to go on vacation. There are things to take into account like gas, which is nearly $6 a gallon nowadays.

Because you have to keep living your life, you will, of course, want to look at the monthly payment difference between various loan products. We also want to look at the overall cost of the loan on a five-year time horizon. For our clients, that's typically far enough out where they can feel comfortable making a decision that encompasses the near future.

Choosing The Best Loan

In Wendy's case, we also looked at the 15-year time horizon, because that was the loan term that Wendy wanted to look at. Ultimately for Wendy, the conventional loan product had the cheapest overall carrying costs in the first five years of the loan. In second place was the FHA loan, and then trailing in third place was the VA loan.

You might be wondering why that VA loan was so expensive. It's because the subsequent use percentage of the VA costs so much more money. In Wendy's case, it was an $8,000 variance to the high side over that FHA loan - simply because of the government’s charge just to use her VA entitlement benefits. So of course, that one was out.

Looking 15 years out, the one good thing about all three loans is that they’re all done by that time. If she didn’t refinance her loan, she would still have just over $35,000 left on her current mortgage. All in all, none of the products were off-limits to Wendy - but one was clearly the winner. She chose the conventional loan.

I'm Here To Help

Overall, the cheapest option for Wendy was the conventional loan, even though it had a slightly higher interest rate than the VA and FHA loan. Those had a big stinking government charge and upfront mortgage insurance premiums that increased the final price. Thankfully, we were able to help Wendy make the best choice for her situation and desired outcome.

So if you're considering a 15-year loan and want to know what your options are, feel free to reach out to me and my team and we'll be happy to help. We can answer any questions you have about the process and do a cost analysis for your situation.

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