Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
15-year mortgage vs 30-year mortgage
Old 02-20-2012, 02:17 PM   #1
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
15-year mortgage vs 30-year mortgage

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?

Quote:
Here are some recent national averages I found on fixed rate mortgages: 15yr @ 3.14%; 30yr @ 3.85%. Using a mortgage calculator at BankRate, I ran the numbers. Assuming all associated closing costs are identical and with the following mortgage assumptions:
...
Monthly principle and interest payments will be:
15-year: $1,394.67
30-year: $937.62
Payment difference: $457.05/mo.

Total Interest Paid:
15 year mortgage: $51,040.53
30 year mortgage: $137,541.93

A 15 year mortgage would save you $86,501.40 over the life of the loan. That isn’t chump change, and is likely to convince many people to go with the 15 year mortgage “if they can afford it.” But we’re not done playing with numbers yet.

Let’s assume you choose the 30 year mortgage, but make the same monthly payment you would have with a 15 year mortgage. Using the same loan assumptions as above, you would pay $68,356.31 in interest on a 30 year mortgage when making the same size payment as the 15 year mortgage (the spread on the interest rates between the 15 and 30 year loans accounts for the difference).

Verdict: Prepaying a 30 year mortgage at this schedule would take an additional 13 months of payments, and $17,315.78 in interest payments vs. the 15 year mortgage. Suddenly the gap isn’t so large. Granted, $17k is a lot of money, but so is the value of flexibility.

Back to the Importance of Cash Flow…
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...
__________________

__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 02-20-2012, 02:41 PM   #2
Dryer sheet wannabe
 
Join Date: Dec 2011
Posts: 18
Wait, so is he recommending the 15 or 30 year? I can't tell. (I'm reading on my phone so maybe I'm missing it?)
__________________

__________________
jennypenny is offline   Reply With Quote
Old 02-20-2012, 02:54 PM   #3
Full time employment: Posting here.
tightasadrum's Avatar
 
Join Date: Aug 2006
Location: athens
Posts: 802
That's about what I would expect. On the other hand, with interest rates so low, I could argue that the increased flexibility of a thirty year loan has a lot to recommend it. I've been playing with this very subject for a couple of weeks trying to figure out what I should do with three mortgages, one on my home. What he doesn't mention is the cost of getting the loan which is not trivial, over 3%. I'll admit I'm leaning toward more flexibility.
__________________
Can't you see yourself in the nursing home saying, " Darn! Wish I'd spent more time at the office instead of wasting time with family and friends."
tightasadrum is offline   Reply With Quote
Old 02-20-2012, 02:57 PM   #4
Full time employment: Posting here.
EvrClrx311's Avatar
 
Join Date: Feb 2012
Posts: 524
Quote:
Originally Posted by jennypenny View Post
Wait, so is he recommending the 15 or 30 year? I can't tell. (I'm reading on my phone so maybe I'm missing it?)
I don't think he is recommending one over the other, but rather pointing out the apples/oranges comparison between 15 and 30 year loans. Though it is convenient to look at the overall interest paid, it isn't really as relevant as most would first assume... since a dollar 30 years from now is a lot different than a dollar 15 years from now.

The clever thing he's done is to compare paying the 15-year rate on both the 30-year and 15-year loan. Obviously the 15-year loan would be paid off in 15 years... while the 30-year one would show how much extra was paid, or rather the left over at the end of 15 years (comes out to about 17K, or roughly 13 months more of payments).

Essentially... the 3.84% loan (30 year) compared to the 3.14% loan (15 year) is costing you an extra $17,315.78 in interest over 15 years.

Another way to look at it... is it worth paying an extra $437.05 a month ($78,669 total) for 15 years to save $17,315 in interest to get a lower rate?

The problem with running math on these numbers is you will always see the bias in one direction... depending on how the information is presented it can appear 30 is better than 15... or the opposite.

In the end it boils down to a simple... 1) can you afford the 15 year over the 30 year?... if yes then 2) do you think you can beat a 3% return over the next 15 years?... if yes, then invest the money and get a 30 year loan... if no, they get the 15-year loan.
__________________
EvrClrx311 is offline   Reply With Quote
Old 02-20-2012, 03:26 PM   #5
Full time employment: Posting here.
 
Join Date: Dec 2010
Posts: 746
For me, it was all about being out of debt. I took out a 15 year loan and paid it off in about 12 years. I did so by buying a nice house in a nice neighborhood. Not the $300,000 one the bank said I could "afford".

Then I kept right on making the house payment - to my savings account. When I was about a year away from early retirement we had a nice chunck of change to buy a nice chunk of land without nipping at any other funds. I then sold the above mentioned house at 155% of purchase price and we moved to the newly acquired ranch.
__________________
East Texas is offline   Reply With Quote
Old 02-20-2012, 03:31 PM   #6
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 42,078
Quote:
Originally Posted by East Texas View Post
I then sold the above mentioned house at 155% of purchase price and we moved to the newly acquired ranch.
Speaking of the ranch, it looks like it's almost time for the Spring chigger roundup. I really don't look forward to it - those little suckers are really tough to brand!
__________________
Numbers is hard

When I hit 70, it hit back

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Old 02-20-2012, 04:04 PM   #7
Thinks s/he gets paid by the post
ronin's Avatar
 
Join Date: Oct 2003
Posts: 1,190
I refi-ed my 30 to a 15 and paid it off in 10 which made it really 20.
__________________
We are, as I have said, one equation short. – Keynes
ronin is offline   Reply With Quote
Old 02-20-2012, 04:28 PM   #8
Full time employment: Posting here.
 
Join Date: Mar 2010
Location: Chicago
Posts: 867
Quote:
Originally Posted by jennypenny View Post
Wait, so is he recommending the 15 or 30 year? I can't tell. (I'm reading on my phone so maybe I'm missing it?)
If you can afford the 15 go with the 30 and invest the difference. By the way happy 1st posting. Welcome aboard.
__________________
ripper1 is offline   Reply With Quote
Old 02-20-2012, 04:38 PM   #9
Full time employment: Posting here.
 
Join Date: Dec 2010
Posts: 746
Quote:
Originally Posted by REWahoo View Post
Speaking of the ranch, it looks like it's almost time for the Spring chigger roundup. I really don't look forward to it - those little suckers are really tough to brand!


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.
__________________
East Texas is offline   Reply With Quote
Old 02-20-2012, 08:02 PM   #10
Full time employment: Posting here.
 
Join Date: Mar 2010
Location: Chicago
Posts: 867
Quote:
Originally Posted by East Texas View Post


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.
My father-in-law is from Port Arthur. Don't mess with Texas.
__________________
ripper1 is offline   Reply With Quote
Old 02-20-2012, 08:49 PM   #11
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
Given that the mortgage loan is the only one you can deduct on taxes, I'd prefer to refi every few years and extend the payback as long as possible. Everything extra is invested. But it was an interesting 15/30 comparison. I still vote for the lower interest rate if you really like paying off mortgages.
__________________
Animorph is offline   Reply With Quote
Old 02-20-2012, 09:35 PM   #12
Thinks s/he gets paid by the post
veremchuka's Avatar
 
Join Date: Oct 2010
Location: irradiated - too close to the nuclear furnace
Posts: 1,294
I think the 30 year makes more sense because you can always pay it off in 15 if you want to but if you can't swing the 15 year (lose job) you are looking at a very large payment that can't be reduced.
__________________
veremchuka is offline   Reply With Quote
Old 02-20-2012, 09:42 PM   #13
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,835
He doesn't consider what I did; took a 15 year mortgage and paid it off in 8
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 02-20-2012, 10:27 PM   #14
Thinks s/he gets paid by the post
packrat44's Avatar
 
Join Date: Jun 2007
Location: near Canadian border and near Mexican border
Posts: 1,142
I am surprised no one suggested the 0 year mortgage and $0 interest with 100% down payment.
__________________
Pigs get fat, hogs get slaughtered. That's my story and I am sticking to it.
packrat44 is offline   Reply With Quote
Old 02-21-2012, 08:43 AM   #15
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
I would tend to base the decision (assuming cash flow wasn't a factor) on the difference in effective interest rates, period. If the difference is, say, 1/2% or less I'd choose the 30 for the flexibility even if I intended to pay it off in 15 or less. Much more than that and I'd probably go with the 15.

Was glad the quote in OP made a particular point I've made in the past -- that if one intends to accelerate the paydown of a 30-year, you can't use the total interest that would be owed over a 30-year amortization by making minimum payments as anything but the "worst case" scenario for extra interest payments... and that if all goes to plan the difference is a LOT less.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 02-21-2012, 08:58 AM   #16
Full time employment: Posting here.
 
Join Date: Jan 2004
Posts: 844
Quote:
Originally Posted by Nords View Post
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 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 never made a secret about my desire to payoff my house as quickly as possible(which I did), he would argue 'Why would I want to pay off my mortgage, then I would lose the tax deduction for the mortgage interest"...so I told him, he should refinance the house and ask for a much higher than normal interest rate....why he asks?....So I said: If the mortgage interest deduction is so important to you, wouldn't an even higher deduction be even better?

We don't talk finance anymore....
__________________
farmerEd is offline   Reply With Quote
Old 02-21-2012, 09:09 AM   #17
Full time employment: Posting here.
tightasadrum's Avatar
 
Join Date: Aug 2006
Location: athens
Posts: 802
Quote:
Originally Posted by farmerEd View Post
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 never made a secret about my desire to payoff my house as quickly as possible(which I did), he would argue 'Why would I want to pay off my mortgage, then I would lose the tax deduction for the mortgage interest"...so I told him, he should refinance the house and ask for a much higher than normal interest rate....why he asks?....So I said: If the mortgage interest deduction is so important to you, wouldn't an even higher deduction be even better?

We don't talk finance anymore....
I loved this. Apparently he listened to your logic from the looks of the current mortgage.
__________________
Can't you see yourself in the nursing home saying, " Darn! Wish I'd spent more time at the office instead of wasting time with family and friends."
tightasadrum is offline   Reply With Quote
Old 02-21-2012, 09:46 AM   #18
Full time employment: Posting here.
EvrClrx311's Avatar
 
Join Date: Feb 2012
Posts: 524


Its a never ending debate... where each side seems to ignore the others reasoning for why their answer is "better" while ignoring what really matters: what works for you?

People for Mortgages:
- comfortable investing large amounts of money
- confident in their ability to get a better return than "(insert interest rate here) steady for the next 30 years"
- leveraging experts... pride in making money work for them.
- have an ability to save that money, instead of spending it


People for Paying It Down:
- conservative
- no desire to chase a higher return (even if history says it is 99.9% sure you can achieve it - easily)
- comfortable with the peace of mind knowing its one less thing they owe.
- love the guarantee



Statements that sound good to one side but make no sense to the other:

"I'm debt free! There is no better feeling" (what the other side hears is... no you just decided to tie your money into a [insert current interest rate here - minus tax write off] fixed rate of return, which is foolish because you can get a much better rate over 30 years investing it in a dozen other ways)

"I just got my rate under 4%! Cheapest money I've ever gotten!" (what the other side hears is... wow, you just obligated yourself to spend $x over the next 30 years when you could have had a sure thing. In retirement, guaranteed and fixed situations are much easier and stress free to deal with.

"I'm accelerating my payoff, in x number of months I'll be ready to retire" (what the other side hears is... what an arbitrary event it is to retire on the date your house is paid off. I wish more people would look at their overall financial health and realize that if you have money in the bank, it is actually better than having it in equity in the house... because you can get to it when you want... spend it when you want... and allow it to make you more money however you want...)

"The math makes it a no brainier... keep the mortgage as high as you can for the lowest rate" (what the other side hears is... you are forgetting that some people are stressed by having that payment every month. Also, if the economy crashed, or identity theft screwed me I'd be left in a situation where I still owed a large payment on my house and I may have little or no money to pay for)



Moral of the story...

YES, historically speaking if the next few years are anything like the last 100 years it makes more sense to have a mortgage (assuming you are responsible and knowledgeable about investing it). You will end up with more money in the long run...

YES, it is safer to pay it down and there is an emotional, psychological release from getting that mortgage out from under you - regardless of if you have the lump sum sitting at a bank, or in a fund to pay it down at a moments notice. It really is a guaranteed return of the interest rate minus inflation... and although it is lower than the stock market average return over every single 20+ year period in history, it is still guaranteed (no investment can make that same claim)

I think the problem is that people need to look at the mortgage for what is really is in retirement... a large loan. In a retirement situation, you would assume someone has the capital to pay off the mortgage since they are retired. Under that assumption the loan is really a small portion of the overall net worth... some people don't mind taking on that loan and beating the return (using money to make more money)... others would just rather not bother, moving towards simplicity in retirement: less payments = less stress.

What works for you?
__________________
EvrClrx311 is offline   Reply With Quote
Old 02-21-2012, 10:20 AM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Lsbcal's Avatar
 
Join Date: May 2006
Location: west coast, hi there!
Posts: 5,676
Quote:
Originally Posted by EvrClrx311 View Post


Its a never ending debate... where each side seems to ignore the others reasoning for why their answer is "better" while ignoring what really matters: what works for you?
...(snip)...
What works for you?
Great summary of the refi personality types out there!

I'm a lifelong leverager. Wouldn't feel good to know I left money on the table. In 10 years when real bond rates are back up to historic averages these low rate loans of today will look pretty good.
__________________
Lsbcal is online now   Reply With Quote
Old 02-21-2012, 10:33 AM   #20
Moderator Emeritus
Bestwifeever's Avatar
 
Join Date: Sep 2007
Posts: 16,373
Quote:
Originally Posted by EvrClrx311 View Post
...People need to look at the mortgage for what is really is in retirement... a large loan. In a retirement situation, you would assume someone has the capital to pay off the mortgage since they are retired. Under that assumption the loan is really a small portion of the overall net worth...
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.

I would bet you have a mortgage just based on the more positive wording of the mortgage holders in your post vs. this leading comment in the mortgage payers section: "(even if history says it is 99.9% sure you can achieve it - easily)"
__________________

__________________
“Would you like an adventure now, or would you like to have your tea first?” J.M. Barrie, Peter Pan
Bestwifeever is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Refinancing Mortgage - Appreciate Advice inquisitive FIRE and Money 47 01-27-2013 09:24 AM
Going bankrupt on $10M per year farmerEd FIRE and Money 33 07-31-2012 11:43 AM
What is your asset allocation for this year? NextInLine Young Dreamers 41 02-23-2012 08:40 PM
Paying off the mortgage early grows in popularity REWahoo FIRE and Money 164 02-23-2012 04:20 PM
1-year mark on ER,org steelyman Other topics 4 02-14-2012 04:06 PM

 

 
All times are GMT -6. The time now is 11:34 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.