15-year mortgage vs 30-year mortgage

[Nords]

I used to have this debate with my brother-in-law (who bought his house in 1972 for $40K and now only owes $425K on it...)

I resemble that remark.

But I'll be debt-free by my 80s, and this time I really mean it!

Do most people with a mortgage in retirement really have the capital to pay it off? With the exception of the strategic mortgage holders here, I wonder how many would pay it off if they could.

"Strategic mortgage holder". Good term.

I've always liked Dave Ramsey's answer to this question. If a caller asks if they should use investments to pay off a $100,000 mortgage and they'd still have enough of an emergency fund, he turns the question around:
"If you had a paid-off home, would you take out a $100,000 mortgage at the same interest rate so you could invest the proceeds?" (Assuming all fees were paid by the lender, even, so this was no-cost to the borrower.)

We did exactly that in early 2002, just before I retired, so that we wouldn't have to worry about whether or not we could ever get a mortgage again.

We used the money to buy Berkshire Hathaway stock.

 

[traineeinvestor]

I've always liked Dave Ramsey's answer to this question. If a caller asks if they should use investments to pay off a $100,000 mortgage and they'd still have enough of an emergency fund, he turns the question around:

"If you had a paid-off home, would you take out a $100,000 mortgage at the same interest rate so you could invest the proceeds?" (Assuming all fees were paid by the lender, even, so this was no-cost to the borrower.)

It's interesting from the standpoint of psychology that so many people who would NOT pay off the mortgage they already have would also refuse to mortgage the home to invest with borrowed money -- even though the end result of both decisions is identical, either a $100,000 mortgage and an extra $100,000 in investments... or no mortgage and $100,000 less in investments.

This quite consistent with behavioural studies showing consistently inconsistent responses to mathematically equivalent positions depending on how the question is phrased. Several of the books on behavioural investing cover the issue, including Jason Zweigs's Your Money & Your Brain (which is well worth a read). The bottom line - people don't always make rational decisions.

 

[traineeinvestor]

Mine did.

18 months prior to my planned retirement date I refinanced my ~$190,000 mortgage to a monthly payment I thought I could comfortably manage. But as the date grew closer I became more and more concerned about having to generate the added retirement income to support that payment. I ended up delaying retirement "one more year" and throwing everything but the kitchen sink into the mortgage to pay it off. I retired five months later.

Everyone is different but for me it was absolutely the right decision.

Yeah, I'm going through that debate at the moment - pay off a ridiculously cheap home mortgage (a floating rate currently around 1% pa tax deductable in a place where inflation hit 6.1% in January) or eliminate the monthly payments? At the moment I'm trying hard to push myself in the direction of keeping the mortgage.

The other issues weighing on my decision are the facts that I could not get a deal that good if I ever wanted to refinance and, post retirement, its not a certainty that I could get a mortgage at all - the banks are not very keen on lending (as much) to people without a regular income.

 

[Finance Dave]

Since we're all getting along so nicely with our current "should we pay off the mortgage or invest" threads, I thought I'd stick my neck out there even further.

This is a post from a personal-finance blogger who I met at USAA last September. (Incidentally he has the best posts on the military TSP that I've ever read.) Ryan Guina looks at the math of getting a 15-year mortgage vs pre-paying a 30-year mortgage at the 15-year payment amount:
15 Year Mortgage Test - Can You Afford It?


It's compelling to get a 30-year mortgage and have the flexibility to pay it off when you want to. It's also compelling to pay it off at the 15-year payment amount, knowing that your 30-year mortgage would become a 16-years-and-1-month mortgage. But that's just a slippery slope to deciding that you'd really rather not have to pay it off at all...

I agree, but to me $17k is quite a bit. We paid off our 15-year mortgage 3 months ago . I know there are opinions on both sides of that fence here, but for us I'm pleased with the decision.

IMO often the ones who need the flexibility mentioned are those who over-extended in the first place...and thus they won't stick to the 15 year schedule anyway.

Buy smaller than you can afford, don't let the bank push you to those 28/36 numbers, and regardless of whether you get 15 or 30, you'll have both less stress AND more flexibility.

 

[rayvt]

I agree, but to me $17k is quite a bit.

$17K spread over 15 (or 30) years? In comparison to the total payments?
Peanuts.

 

[Finance Dave]

$17K spread over 15 (or 30) years? In comparison to the total payments?
Peanuts.

I'll be happy to take it if you want to send me the check.

 

[brewer12345]

I've always liked Dave Ramsey's answer to this question. If a caller asks if they should use investments to pay off a $100,000 mortgage and they'd still have enough of an emergency fund, he turns the question around:

"If you had a paid-off home, would you take out a $100,000 mortgage at the same interest rate so you could invest the proceeds?" (Assuming all fees were paid by the lender, even, so this was no-cost to the borrower.)

It's interesting from the standpoint of psychology that so many people who would NOT pay off the mortgage they already have would also refuse to mortgage the home to invest with borrowed money -- even though the end result of both decisions is identical, either a $100,000 mortgage and an extra $100,000 in investments... or no mortgage and $100,000 less in investments.

I did exactly that. Drew a hunk of cash on an untapped HELOC and ran around buying investment grade bonds that everyone was throwing out the window in early 2009 at double digit yields.

 

[martyb]

It's odd - we really don't have chiggers here and I'm not sure why. We'll have grasshoppers big enough to saddle because we only had two days below freezing this "winter". And I think it's going to be a bad tick season.

We've received 10.3" of rain so far this year - much, much better than the previous five years. At least we didn't have any of the wildfires that were over your way this past fire season. The drought has been bad enough, we didn't need fire on top of it.

It was 88 degrees yesterday in East Texas, in late February. If you think the chiggers are gonna be bad, wait till those B-52 size mosquitoes and pissed-off fire ants that didn't get killed off this winter start coming back out to play....

 

[Finance Dave]

I did exactly that. Drew a hunk of cash on an untapped HELOC and ran around buying investment grade bonds that everyone was throwing out the window in early 2009 at double digit yields.

But what if your HELOC resets at a much higher rate, and then you want to cash in the bonds to pay off the HELOC, but the bonds price has gone down?

 

[brewer12345]

But what if your HELOC resets at a much higher rate, and then you want to cash in the bonds to pay off the HELOC, but the bonds price has gone down?

I bought 5 year(ish) maturitiesin 2009 and had sold them all by early 2011. My average YTM at time of purchase was north of 10% and my HELOC was interest only at 2.75%. I was not real worried about it.

Nowadays, a similar move would be suicide.

 

[Finance Dave]

I bought 5 year(ish) maturitiesin 2009 and had sold them all by early 2011. My average YTM at time of purchase was north of 10% and my HELOC was interest only at 2.75%. I was not real worried about it.

Nowadays, a similar move would be suicide.

Thanks for your response, sounds like you had a good plan. I think others may fail to consider a rise in HELOC rates...which IMO is a given in the next 2-5 years.

I am currently financing rental properties with a HELOC, and the DW and I have agreed that we refuse to finance anything that we cannot afford to pay off in the next 3 years.

In theory we could have used cash on our recent rental...but that would have wiped out our emergency fund. We also have plenty of other money...but it's tucked away in either non-liquid investments or in 401k plans...that we can't get to easily for another 3-4 years.

 

[East Texas]

It was 88 degrees yesterday in East Texas, in late February. If you think the chiggers are gonna be bad, wait till those B-52 size mosquitoes and pissed-off fire ants that didn't get killed off this winter start coming back out to play....

<sidebar> We were in your area Thursday supporting the Lufkin economy.

We had to spray Yard Guard on the porch a few days ago because the darn mosquitoes were relentless. We hang fly bags on the porch - just can't figure out how to make a "mosquito bag".

You're right about the fire ants popping out all over the place. We buy Amdro by the 25 lb bag. I need to chop up some Grape Nut Flakes, and add a little special treat, and sprinkle the leaf cutter ants.

It must be Spring in the country...

 

[CorporateSoldier]

Great discussion here folks. The Dave Ramsey quote really sums up the issue for many of us I think.

The only factor that I think needs to be emphasized a bit more here is what that 15 year payment looks like relative to your income. If the monthly payment on the 15 year loan is a bit of a stretch, then the 30 is likely a better option. We refinanced a year ago and went with the 15 since the payment is no problem at all for us and we could, if we really wanted to, pay the thing off now. We are exaxctly in the Dave Ramsey zone - $140,000 left on the mortgage and about that in non-retirement acount investments.

My 15 year, easy to pay mortgage at 3.8% aligns nicely with our goal of retiring in about 15 years.