JMAC’s brokers know that the most popular choice for home financing is the 30-year fixed-rate mortgage. In fact, more than 8 out of 10 homebuyers choose this option. Many people never even consider the 15-year variety -- even when they should.
Our brokers will tell clients that when JMAC qualifies you for a mortgage, the main factor that determines how much you can borrow is your debt-to-income ratio, or DTI. Most lenders use two DTI numbers, known as the front-end and back-end ratios. The front-end ratio refers to your new mortgage payment relative to your monthly debt obligations, and many banks want this to be under 28%. In other words, multiply your pre-tax income by 0.28, and this is the monthly payment you can handle, based on the front-end ratio.
On the other hand, the back-end ratio includes all your monthly debts. This ratio generally needs to be 36% or less, but it's not uncommon for lenders to stretch this limit to 45% for otherwise well-qualified borrowers. Your maximum mortgage amount is limited by the lower of the two calculated payments.
JMAC’s brokers have found that the biggest misunderstanding when it comes to 15-year mortgages is many people assume that because a 15-year mortgage is half the duration of a 30-year, borrowers will simply end up paying half as much interest. This is not necessarily true. It is viable that a 15-year mortgage payment may be just 45% more, even though it will pay off the loan twice as fast.
Our brokers will suggest a 15-year mortgage may be a good choice if a borrower can answer yes to any of these. Can a borrower can afford a higher payment, relative to the amount of "house" they need? Is your job stable, and are you confident in your long-term ability to make higher payments? Are you close to retirement age and don't want to retire with mortgage debt?
Valid reasons to focus on a 30-year mortgage could include if your job is relatively unstable. If you become unemployed, the lower payments of a 30-year mortgage could be easier to handle. Or if you don't have any emergency savings. Lower mortgage payments could allow you to build up your reserves. And if you want to save more aggressively for retirement instead of putting more of your income toward housing.
JMAC’s AEs are more than happy to work with our key broker clients in helping borrowers determine the best program for them.