15-year mortgage vs 30-year mortgage
02-20-2012, 02:17 PM   #1
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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...
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 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?)
 02-20-2012, 02:54 PM #3 Full time employment: Posting here.   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."
02-20-2012, 02:57 PM   #4
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Quote:
 Originally Posted by jennypenny 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.

 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.
02-20-2012, 03:31 PM   #6
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Quote:
 Originally Posted by East Texas 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!
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 02-20-2012, 04:04 PM #7 Thinks s/he gets paid by the post   Join Date: Oct 2003 Posts: 1,269 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
02-20-2012, 04:28 PM   #8
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Quote:
 Originally Posted by jennypenny 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.

02-20-2012, 04:38 PM   #9
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Quote:
 Originally Posted by REWahoo 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.

02-20-2012, 08:02 PM   #10
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Quote:
 Originally Posted by East Texas 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.

 02-20-2012, 08:49 PM #11 Thinks s/he gets paid by the post   Join Date: Jul 2005 Posts: 4,232 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.
 02-20-2012, 09:35 PM #12 Thinks s/he gets paid by the post   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.
 02-20-2012, 09:42 PM #13 Thinks s/he gets paid by the post   Join Date: Feb 2006 Posts: 4,859 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: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional Retired Mar 2014 at age 52, target WR: 0.0%, Income from pension and rent
 02-20-2012, 10:27 PM #14 Thinks s/he gets paid by the post   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.
 02-21-2012, 08:43 AM #15 Moderator   Join Date: Oct 2005 Location: North Oregon Coast Posts: 16,475 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)
02-21-2012, 08:58 AM   #16
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Quote:
 Originally Posted by Nords 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....

02-21-2012, 09:09 AM   #17
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Quote:
 Originally Posted by farmerEd 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.
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 02-21-2012, 09:46 AM #18 Full time employment: Posting here.   Join Date: Feb 2012 Posts: 628 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?
02-21-2012, 10:20 AM   #19
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Quote:
 Originally Posted by EvrClrx311 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.

02-21-2012, 10:33 AM   #20
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Quote:
 Originally Posted by EvrClrx311 ...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)"
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