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Old 11-20-2013, 05:06 PM   #21
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With him being 24 I'd lean toward the 30-year with IlliniProgrammer's caveats. A lot of stuff can happen and he still has the flexibility of making extra principal payments but suspending that for a bit if finances go south for a while.

Since we don't know the amount of his mortgage we can't tell how much that percentage point will cost in dollars but it may not be significant if he pays it off early anyway.
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Old 11-20-2013, 05:58 PM   #22
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15 year fixed mortgages have been around a lot longer than since the 80's and don't compare to ARM mortgages - which were new in that time frame. Just wanted to clarify that.

To the OP - I agree with the general consensus - go for the 30, but pay it as a 15, given his age. If he were in his 40's my advice would be to go for a 15 year or shorter.

We've got a 15 year mortgage I refi'd into 6 years ago. It will be paid off next year. But I set all of my retirement planning around not having a mortgage.

My in laws had their first mortgage in the 1940's as a 10 year mortgage - that was the standard back then. They paid it off early... as was also common.

Relatives overseas all have shorter mortgages as well... because that's all that is available. No Fannie/Freddie to backstop the mortgages and the banks don't want the long term risks.
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Old 11-20-2013, 08:19 PM   #23
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My single, very mature (no debt, drives a 15 year old car) 24 yr old son just got out of grad school and started working in his dream job - he's a musician and plays with the Atlanta Symphony. He is very thrifty (always a good thing for a musician), is very "promotable" (could move from Atlanta to other orchestras as he gets older), and quite handy at most anything from construction to car repair - again, all good things if you are a musician.

Since he needs to practice at home he decided he wanted a house vice an apartment. And, since his income level puts him in a pretty high bracket the advantages of mortgage interest and property tax deductions appeal to him. After two months of getting to know the area, getting to understand traffic patterns and neighborhoods, he's found a house and seller and buyer have agreed on price. While the mortgage broker is having a harder than normal time getting him approved since he has nearly zero credit history, his income level is working in his favor, and she beleves she will be able to work it. All OK so far and he's learned a LOT.

The last thing I have asked him to research is whether he wants a 30 yr or 15 year mortgage. I provided all the background info to help anyone who would like to comment - which would you recommend, and why - given his circumstances?

Thanks in advance!
We had a lot of rentals and a fear of a number of the being vacant at the same time so we did the 30 yr and made extra payments.
That way if things got tight we would not have to make the extra payments or make the payment on a higher 15 yr note. We paid a little higher interest on the note but in the long run it did not make that much difference.
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Old 11-20-2013, 09:56 PM   #24
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15 year fixed mortgages have been around a lot longer than since the 80's and don't compare to ARM mortgages - which were new in that time frame. Just wanted to clarify that.

To the OP - I agree with the general consensus - go for the 30, but pay it as a 15, given his age. If he were in his 40's my advice would be to go for a 15 year or shorter.

We've got a 15 year mortgage I refi'd into 6 years ago. It will be paid off next year. But I set all of my retirement planning around not having a mortgage.

My in laws had their first mortgage in the 1940's as a 10 year mortgage - that was the standard back then. They paid it off early... as was also common.

Relatives overseas all have shorter mortgages as well... because that's all that is available. No Fannie/Freddie to backstop the mortgages and the banks don't want the long term risks.
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Ummm, hi. I'm one of those greedy corporate bankers. (OK, I worked as a strategist in trading at an investment bank.)

1.) 30 year mortgages have been around since dinosaurs roamed the earth. 30 year mortgages issued at 6% in 1970 put a lot of thrifts into trouble when interest rates were hitting 15% in the 1980s.
2.) IIRC, 15 year mortgages, as well as ARMs, were kinda the new things back in the 1980s after Reagan started to deregulate commercial/retail/"traditional" banking. I wasn't alive then, but it's my understanding that Saturday Night Special rate hikes of ~1980 introduced a lot of volatility to the interest rates market, which made 15-year mortgages more economical than 30-year mortgages.

Have a nice day!

15 year mortgages have been around a lot longer than 30 year ones. Most people should recall their grandparents or parents having a 15 year, not a 30.

The first mortgages backed by the FHA started in the 1930's and they were 5-7 years. They then lengthened the term to 15 which was the common length of term for decades. Eventually 15 got doubled and stretched to 30.

From "history of home mortgages in the United States"

http://home.howstuffworks.com/real-estate/mortgage2.htm
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Old 11-20-2013, 10:27 PM   #25
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15 year mortgages have been around a lot longer than 30 year ones. Most people should recall their grandparents or parents having a 15 year, not a 30.

The first mortgages backed by the FHA started in the 1930's and they were 5-7 years. They then lengthened the term to 15 which was the common length of term for decades. Eventually 15 got doubled and stretched to 30.

From "history of home mortgages in the United States"

HowStuffWorks "History of Mortgages"
I skimmed through that whole multi-screen article, and the only thing I saw about the mortgage term was
Quote:
Not that long ago, there was only one type of mortgage offered by lenders: the 30-year, fixed-rate mortgage.
I'm not going to dispute which came first, because I don't know the answer. But there's nothing inherently evil about a 30 year term. I chose it specifically because I believe that over those 30 years (or however long I live in my home) my interest rate will be made so small due to inflation and rate increases that I'll make out like a bandit over that time. It's a gamble, but no more than investing in equities or bonds.

As far as the OP, to me it depends on his income and discipline. I know a lot of people are recommending that he take a 30 year and pay it down in 15, but I personally would take the 30 year, pay it as required, and save and invest the difference. That does take some discipline, but an automatic deposit into savings can make it pretty much transparent. That's one of the ways I got started in LBYM and investing, by banking raises and the car payment (first new car, only car loan I ever needed) after it got paid off. It paid off for me, as I was able to retire at age 50.

Despite the gospel around here sometimes, debt is not a sin. It's a tool, like a hammer or a gun. It can be harmful, or it can improve your life. It's all in how you use it.
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Old 11-20-2013, 11:37 PM   #26
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30 yr and let inflation do its job. He should get a roommate too.
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Old 11-21-2013, 03:51 AM   #27
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The future for classical musicians doesn't look all that good frankly. The New York City Opera just failed. There are fewer classical radio stations. Musicians of the Minnesota Orchestra were just locked out. The Philadelphia Orchestra filed for Chapter 11 a couple of years ago. Doesn't look like a growth industry.
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Old 11-21-2013, 06:27 AM   #28
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I skimmed through that whole multi-screen article, and the only thing I saw about the mortgage term was

I'm not going to dispute which came first, because I don't know the answer. But there's nothing inherently evil about a 30 year term. I chose it specifically because I believe that over those 30 years (or however long I live in my home) my interest rate will be made so small due to inflation and rate increases that I'll make out like a bandit over that time. It's a gamble, but no more than investing in equities or bonds.
Don't read so fast!

"The FHA also started the trend of qualifying people for loans based on their actual ability to pay back the loan, rather than the traditional way of simply "knowing someone." The FHA lengthened the loan terms. Rather than the traditional five- to seven-year loans, the FHA offered 15-year loans and eventually stretched that out to the 30-year loans we have today."
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Old 11-21-2013, 07:06 AM   #29
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The advent of the 30 year mortgages popularity has not been kind to the finances of the yuppie and baby boomers. It locked them into debt for too many of their prime earning years. 15 year mortgages made more sense until corporate banking greed decided it was better to stretch the financial bondage twice as long as what used to be a healthy norm. ....
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Don't read so fast!

"The FHA also started the trend of qualifying people for loans based on their actual ability to pay back the loan, rather than the traditional way of simply "knowing someone." The FHA lengthened the loan terms. Rather than the traditional five- to seven-year loans, the FHA offered 15-year loans and eventually stretched that out to the 30-year loans we have today."
So Al, I'm confused. Was it the greedy corporate bankers or the government (through the FHA) who stretched the terms?

I think the reality is that the banks generally do what the government steers them to do through policy and given a public policy goal of increased home ownership the government steered the banks to provide longer term loans so owning a house would be more affordable. Later on, the geniuses in DC decided to extend home ownership even further, and that was the beginning of the sub-prime meltdown and the great recession.

With with respect to the OP, given the ~100 bps difference in rates, if the PITI is 30% or less of gross income, the borrower's job and job prospects are good and the borrower would still have a healthy emergency fund, I would take the savings of the 15 year loan.
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Old 11-21-2013, 07:17 AM   #30
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One word. Lobbyists.


Don't think for minute our guvmint acts on its own
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Old 11-21-2013, 07:23 AM   #31
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At the risk of introducing some fact into the discussion, this NBER paper from 1956 shows mortgage duration increase happened when the loans changed from non-amortizing to amortizing. Table 67 shows a distinct shift beginning in the mid-30's through the late 40's. http://www.nber.org/chapters/c1331.pdf
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Old 11-21-2013, 07:28 AM   #32
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One word. Lobbyists.


Don't think for minute our guvmint acts on its own
I get it now. You're one of those.....

I guess we'll have to agree to disagree.
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Old 11-21-2013, 07:49 AM   #33
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Bingo Michael thank you. Longer but better source. I figured this was as well known as the fact that b&w TV csme before color. I remember my parents discussing the advent of the newer 30 year fixed loans as a kid. Of course I watch Madmen on TV also!
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Old 11-21-2013, 08:06 AM   #34
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My parents bought their home (where my mom STILL lives & I grew up) in NC, soon after my dad got out of the Army in 1958. They got a VA loan for 20 years, at 3% interest. The payments were around $82. They used the whole 20 years, never made any additional payments and I remember when they made the final payment. They were thrilled....I never mentioned to them they could have paid it off way sooner. In reality, they probably were better off money-wise doing it the way they did, given the low interest rate. Once they could have actually paid it off, they had probably already passed the point where there would have been any significant savings on the interest.
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Old 11-21-2013, 08:07 AM   #35
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From what I was told by my dad.... (who was a RE agent way back when)...

During the 50s to 60s the 'normal' loan was 20 years.... it started to stretch out longer so people could buy a bigger home than with a shorter loan...

Now you can get a 40 year and I looked it up, even a 50 year mortgage!!!
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Old 11-21-2013, 08:10 AM   #36
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I vote for the 30 year loan unless his cash flow is a lot bigger than he needs even with a 15 year loan...


I am also on the side of not paying it down faster until there is a good amount of savings.... not just the normal 6 months of living expenses...

And if you get a really low rate, not paying it down at all.... I do not see rates being this low 5 or 10 years from now... so the market will be paying you a higher rate than you owe....
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Old 11-21-2013, 09:40 AM   #37
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And if you get a really low rate, not paying it down at all.... I do not see rates being this low 5 or 10 years from now... so the market will be paying you a higher rate than you owe....

That's why I'm on the fence about paying off our 4 1/4% 30 yr loan. My original thought was to pay it off in about 2 years, but not sure yet. On one hand it would be really nice not to have the mortgage, but on the other hand, I'd sure hate to take that much out of my savings and in reallity, there's a fair chance to earn a better return on the money than I'd save by retiring the mortgage.
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Old 11-21-2013, 11:30 AM   #38
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That's why I'm on the fence about paying off our 4 1/4% 30 yr loan. My original thought was to pay it off in about 2 years, but not sure yet. On one hand it would be really nice not to have the mortgage, but on the other hand, I'd sure hate to take that much out of my savings and in reallity, there's a fair chance to earn a better return on the money than I'd save by retiring the mortgage.

And the problem is that if you pay it off now and rates do go up a lot..... you have no way of getting your low rate back...

I have a low rate 15 year and plan on taking all 15 years to pay it off...
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Old 11-21-2013, 11:34 AM   #39
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And the problem is that if you pay it off now and rates do go up a lot..... you have no way of getting your low rate back...

I have a low rate 15 year and plan on taking all 15 years to pay it off...
+1
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Old 11-21-2013, 11:53 AM   #40
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And the problem is that if you pay it off now and rates do go up a lot..... you have no way of getting your low rate back...

I have a low rate 15 year and plan on taking all 15 years to pay it off...
+2 (14 years left @ 2.5% fixed)
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