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15 vs. 30 yr mortgage
Old 08-19-2017, 03:46 PM   #1
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15 vs. 30 yr mortgage

If I am 30 and can afford to buy a house with a 15 yr mortgage, why wouldn't I use a 30 yr mortgage and invest the difference. The S&P index is yielding more than the interest rate on the mortgage rate. After all, my house is going to appreciate about as much as property taxes each year. Housing seems like a lousy investment.

Thoughts?
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Old 08-19-2017, 03:53 PM   #2
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Housing is where you live... not an investment. When you sell you may make a gain or you may make a loss.... luckily I have had some handsome gains (much more than what I paid in property taxes) but I know of people who have had some significant losses.

I prefer 15 year mortgages because they offer the lowest interest rates.

A key question to ask yourself is whether you will really have the discipline to invest the difference.
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Old 08-19-2017, 04:21 PM   #3
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Originally Posted by thepalmersinking View Post
If I am 30 and can afford to buy a house with a 15 yr mortgage, why wouldn't I use a 30 yr mortgage and invest the difference. The S&P index is yielding more than the interest rate on the mortgage rate. After all, my house is going to appreciate about as much as property taxes each year. Housing seems like a lousy investment.

Thoughts?
Housing is housing. Depending on where you live, when you buy, and what you pay, it can be a good investment or not. Everyone needs a place to live, and whether renting is better than buying, and how much you spend is totally market-specific. In NYC or SoCal I'd buy the most house I could afford, not in Missouri where I might take a different approach.

If you are taking a 30-year mortgage you're pretty leveraged; so housing can be a very awesome investment considering your return on invested capital. With stocks you are paying all the cash up front to get your [projected and speculative] return. With a mortgage, you only invest a small amount of your cash in the beginning and get the benefit of 100% of the asset appreciation in real time whether you've paid for it or not.

A 30-year mortgage carries a slightly higher interest rate, but it does offer the flexibility to pay it off anytime before 30 years anyway. With a 15-year mortgage, it's a way to build equity faster, pay off your mortgage sooner and save the interest expense. Many people like to get their house paid off before ER. Today, the S&P might be yielding returns that are worth it. Tomorrow, who knows?

You may want to get a 30-year mortgage with 13 payment periods per year as a compromise. It only costs you one extra payment per year, but can save years of payments over a 30-year term.
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Old 08-19-2017, 04:26 PM   #4
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Housing is housing. Depending on where you live, when you buy, and what you pay, it can be a good investment or not. Everyone needs a place to live, and whether renting is better than buying, and how much you spend is totally market-specific. In NYC or SoCal I'd buy the most house I could afford, not in Missouri where I might take a different approach.

If you are taking a 30-year mortgage you're pretty leveraged; so housing can be a very awesome investment considering your return on invested capital. With stocks you are paying all the cash up front to get your [projected and speculative] return. With a mortgage, you only invest a small amount of your cash in the beginning and get the benefit of 100% of the asset appreciation in real time whether you've paid for it or not.

A 30-year mortgage carries a slightly higher interest rate, but it does offer the flexibility to pay it off anytime before 30 years anyway. With a 15-year mortgage, it's a way to build equity faster, pay off your mortgage sooner and save the interest expense. Many people like to get their house paid off before ER. Today, the S&P might be yielding returns that are worth it. Tomorrow, who knows?

You may want to get a 30-year mortgage with 13 payment periods per year as a compromise. It only costs you one extra payment per year, but can save years of payments over a 30-year term.
Note that unless there is a prepayment penalty on the mortgage, nothing prevents you from sending principal payments at any time. Print out an amortization schedule for a 30 year mortgage (available from many sites on the web) and notice how many months say paying the additional month in principal cuts off the term. Of course this does decrease the value of the vaunted Mortgage Interest deduction as well. By just making the addiional payment when finances permit you get some flexibility.
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Old 08-19-2017, 04:35 PM   #5
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Note that unless there is a prepayment penalty on the mortgage, nothing prevents you from sending principal payments at any time. Print out an amortization schedule for a 30 year mortgage (available from many sites on the web) and notice how many months say paying the additional month in principal cuts off the term. Of course this does decrease the value of the vaunted Mortgage Interest deduction as well. By just making the addiional payment when finances permit you get some flexibility.
Very good advice!
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Old 08-19-2017, 04:43 PM   #6
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Sometimes the 15 yr rate may be slightly better, so if you planned to pay it in 15 anyway, you'll pay less over the lifetime.

But if they are basically equal, go 30 year, and assuming no prepay penalty, pay it like it's 15 when you can.

Housing can be a lousy investment unless you are lucky. I got a 100% return (house doubled while I owned it) when I bought in 2002 and sold in 2005. That helped me a long way towards ER (since I was selling to move in with DH and invested the proceeds).
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Old 08-19-2017, 05:21 PM   #7
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Originally Posted by thepalmersinking View Post
If I am 30 and can afford to buy a house with a 15 yr mortgage, why wouldn't I use a 30 yr mortgage and invest the difference. The S&P index is yielding more than the interest rate on the mortgage rate. After all, my house is going to appreciate about as much as property taxes each year. Housing seems like a lousy investment.

Thoughts?
The S & P 500 is currently yielding a hair under 1.9%. Where are you able to find a mortgage rate lower than that?
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Old 08-19-2017, 05:32 PM   #8
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Just like any question on mtg it matters what you think... as you can see, you already have many different answers and you will get more...


To me it is an interest rate and cash flow question.... is the interest rate that much different between the two... if they are close I would go for 30 since it gives max flexibility.... you can choose to go 30 years or go for less... if you go 15 then that limits your choices... also, if you get laid off then the cash flow would be less with the 30....
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Old 08-19-2017, 05:48 PM   #9
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Good in theory. The average person would spend the difference.
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Old 08-19-2017, 05:54 PM   #10
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Good in theory. The average person would spend the difference.
The average person doesn't retire early either.

-ERD50
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Old 08-19-2017, 06:30 PM   #11
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The S & P 500 is currently yielding a hair under 1.9%. Where are you able to find a mortgage rate lower than that?
OP was refering to total/investment yield, not dividend yield. His point was that money invested in the equities would likely earn more than the interest that his would be paying.
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Old 08-19-2017, 06:34 PM   #12
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For me, it was a good compromise between paying cash (when I could get more in the investments) and dragging payments out over 30 years. With a 15-year you build some equity, which is a good cushion against ending up underwater on a 30. I also got a lower interest rate.
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Old 08-19-2017, 06:44 PM   #13
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When we took out our various mortgages, we went 30 years every time. We thought about the 15 year. But we considered the 30 year mortgage as insurance against losing the house due to having (or needing) a lower paying job or one of our incomes being lost. A 15 year mortgage could mean that 10 years down the road, we, I, or my widowed wife wouldn't be able to make the higher monthly payment, possibly loosing the house. I know the 30 year path costs a lot more both in interest rate and interest $ paid. We considered that choice one part of our long term security.

Paying higher monthly payments could reduce the overall costs. Most years we were generally earning better interest on investments, so we let it ride. Different strokes....
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Old 08-19-2017, 09:16 PM   #14
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Originally Posted by thepalmersinking View Post
If I am 30 and can afford to buy a house with a 15 yr mortgage, why wouldn't I use a 30 yr mortgage and invest the difference. The S&P index is yielding more than the interest rate on the mortgage rate. After all, my house is going to appreciate about as much as property taxes each year. Housing seems like a lousy investment.

Thoughts?
You wouldn't because you can always pay off the mortgage early with your investment gains. Next question.

But yield is not the same as total return and there are many S&P indexes.
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Old 08-19-2017, 09:24 PM   #15
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Go with a 30, and pay it like a 15 year mortgage.

If you really want to "invest the difference", go with an interest only ARM. That gives you the most disposable "extra".

If you really want the most to invest, rent an apartment, do not buy a house.
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Old 08-20-2017, 04:11 AM   #16
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Look at it from an options standpoint.
You have a lower payment on a 30 yr. YOU have the option to stay put, or pay it down early. (A lower payment could be crucial should you lose a job). You also have increased cash flow. You can invest the extra $ or pay down other debt.

There are only two good reasons to get a 15 year. If you think you are not disciplined enough to pay down the mortgage on your own, and a lower interest rate. To me, a reduction of 1/4 to 1/2 percent on a 15 year is hardly worth losing the options of a 30 year.
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Old 08-20-2017, 08:03 AM   #17
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Difference is more like 5/8ths today.

I disagree. We preferred 15 year because the rate was lower and it paid off faster so our total interest was lower. I concede if your employment situation is tenuous then the flexibility of the 30 year is worthwhile.... for us the 1/2%+ rate difference was more valuable since my employment was stable.

IMO, taking a 30 year and paying it like a 15 year is the worst of both worlds.... it is just like a 15 year but you pay ~15% more in interest in exchange for more financial flexibility. A well funded emergency fund mitigates the financial flexibility risk so in the end you just pay ~15% more in interest.

Quote:
Today’s Mortgage Rates and Refinance Rates

Product Interest Rate APR
Conforming and Government Loans
30-Year Fixed Rate 4.000% 4.030%
30-Year Fixed-Rate FHA 4.625% 5.670%
30-Year Fixed-Rate VA 3.875% 4.168%
15-Year Fixed Rate 3.375% 3.427%
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Old 08-20-2017, 08:15 AM   #18
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Like others here, I always preferred a 30 year so that I had cash flow flexibility not just in times of stress (what if I lost a job) but for other reasons as well.

That said, I'm pathologically averse to debt for many reasons. We relo'd from a moderate cost market to a high cost market at the peak of the bubble in 2006. I wound up with a mortgage almost 3x what I had and then the world went wobbly on all of us.

I went on a "pay the mortgage" crusade and knocked it out in about 7 years.

From a net worth perspective, I left lots of money on the table by paying the mortage vs. investing it in the market. But I did/do have the discipline to invest everything that's not currently going into the mortgage and I'm quite happy with my net worth curve from then until now.

Personally, I'd choose 30 years and then pound on the principal to get it down to 15, 7, 5, 3 or 0 depending on your debt appetite. YMMV
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Old 08-20-2017, 10:30 AM   #19
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Look at it from an options standpoint.
You have a lower payment on a 30 yr. YOU have the option to stay put, or pay it down early. (A lower payment could be crucial should you lose a job). You also have increased cash flow. You can invest the extra $ or pay down other debt.

There are only two good reasons to get a 15 year. If you think you are not disciplined enough to pay down the mortgage on your own, and a lower interest rate. To me, a reduction of 1/4 to 1/2 percent on a 15 year is hardly worth losing the options of a 30 year.


+1
We refinanced from a 15 yr to a 30 yr mortgage a few years ago. At that time the rate differential we were quoted was only a quarter of a point. We like our 3.375% 30 year mortgage and will likely keep mortgage debt forever. Our portfolio returns have averaged much more than this. We have plenty of assets we could withdraw from our taxable portfolio to just pay it off in full but we'd rather have more flexibility and liquidity.
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Old 08-20-2017, 10:58 AM   #20
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OP was refering to total/investment yield, not dividend yield. His point was that money invested in the equities would likely earn more than the interest that his would be paying.
I don't know what OP meant, but what he/she wrote was the yield was higher than the rate on the loan. According to Investopedia, "The yield is the income return on an investment, such as the interest or dividends received from holding a particular security. The yield is usually expressed as an annual percentage rate based on the investment's cost, current market value or face value."

This is different from total return (not referred to as total yield as you state), which would include any capital gains or losses.

Specific is terrific.
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