30 vs 15 yr mortgage

[stephenson]

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!

 

[ziggy29]

For me it would depend on the difference in interest rates. The 15-year will pretty much always be a lower rate, but if the rates aren't *that* much different and someone has the financial discipline to do it, I'd consider the 30-year and pay it off on a 15-year schedule. That way if he hits a "lean period" in terms of income, or has a sudden large expense (home repair, major car repair, medical problems) he could scale the payments back for a while.

 

[kaudrey]

I agree with ziggy. Rates are low on a 30-year and it does give him more flexibility in case things don't work out as planned. He can always pay more principal each month if he has the money.

 

[stephenson]

Kaudry and Ziggy,

That is the balanced advice most of us have grown up with and use - and, I agree with it. My own history points to the flaw, which is human nature. The discipline required to pay additional as you go on the 30 is pretty significant - I tried and was never able to keep it up. I did a 15 yr on a rental house about 20 years ago and was shocked to find it was paid off at 15 ...

 

[haha]

Go with the 30. Every young person should.

Ha

 

[someguy]

Unless there is at least a 1.5% difference between the 15 and 30 year rates, IMO not even worth debating: 30-year all the way. If he's as disciplined as he sounds, I'd further vote for putting the monthly "savings" on a 30-year into an AA appropriate for his age (i.e., high in equities) versus paying it down faster, but that is an eternal debate on here of almost religious import.

 

[Katsmeow]

Agree with most. If you get the 30 year, you have more flexibility and can always pay it off sooner. With the 15 there is not that flexibility. All of this is based upon current rates of course.

 

[Live And Learn]

Kaudry and Ziggy,

That is the balanced advice most of us have grown up with and use - and, I agree with it. My own history points to the flaw, which is human nature. The discipline required to pay additional as you go on the 30 is pretty significant - I tried and was never able to keep it up. I did a 15 yr on a rental house about 20 years ago and was shocked to find it was paid off at 15 ...

My personal history - I've done it twice ! Its not that difficult to do really, especially if you are young and can put your salary raises into the mortgage payment. I also made one extra payment a year. When I had a windfall (ie: tax refund) that too went into the house. I'd follow Ziggy's advice all the way.

 

[pb4uski]

I would look at the difference in rates and the difference in PITI (principal, interest, taxes and insurance) as a percentage of income. If the difference in rates is attractive and the 15 year is not going to strain his finances (IOW, he can afford the payments on the 15 year mortgage) then I would lean to the 15 year.

That said, when I was younger and our finances were not as robust we went with the 30 year, later in life when we had more income and PITI was more affordable we went with the 15 year and took advantage of the lower interest rate.

 

[Calico]

I agree with several previous posters. I took out a 30-year and will have it paid off at 15 years. I've been very disciplined about paying extra principal regularly, BUT there were a few times (very expensive vet bills; ditto on dental bills) when I took a "break" from the extra principal for a few months, and paid for my vet's and my dentist's second homes instead. Having that flexibility was/is key.

 

[akck]

Newly starting out first time home owner, I'd go with a 30-year. You don't know what you'll find in the house that needs repairing or replacing, so you might need to up your maintenance budget. Once he's past that, he may have the opportunity to refinance to a 15-year mortgage, if rates drop in the future. In any case, he can always pay more each month.

 

[IlliniProgrammer]

Is this a stable career? Is it like working as an engineer at GE where he can expect to get laid off once every 30 years but not once every 3-5?

If he can make the payments, and if he isn't too worried about how big or expensive his house is, I'd steer him towards a 30-year mortgage.

He absolutely needs 8 months worth of expenses (including the mortgage payment) saved before buying.

He should try to put 20% down so he can avoid PMI.

He should try to get a mortgage rate locked in sooner rather than later.

He may want to consider a credit union, which won't treat him any more unfairly than a bank, but will likely offer lower closing costs.

Congratulations to you and your son.

 

[IlliniProgrammer]

I agree with several previous posters. I took out a 30-year and will have it paid off at 15 years. I've been very disciplined about paying extra principal regularly, BUT there were a few times (very expensive vet bills; ditto on dental bills) when I took a "break" from the extra principal for a few months, and paid for my vet's and my dentist's second homes instead. Having that flexibility was/is key.

This is a good point. A 30 year mortgage gives you more flexibility. But right now it comes at about a 1% cost in terms of interest rates. That's about $160/month on a $200K mortgage.

One other mortgage to just consider might be a 10/1 ARM with an interest rate cap. This may be a good middle ground on flexibility and getting a good rate if your son intends to pay off his home relatively quickly. 10/1 ARMs with 5% rate caps seem to be going for 30 basis points more than 15 year mortgages, so by my back of the envelope calculation, this puts the maximum interest rate at ~8.5% which is high but not unreasonable. An interest rate reset might be a problem if DS needs thirty years to pay off the loan, but if he buys a small house and just occasionally needs the option to pay on a 30 year schedule rather than a 15 year schedule, a 10 year ARM could make some sense here.

 

[Ready]

Without knowing the rate differential it's hard to give any concrete advice here. A quick look at bankrate.com shows a 30 year rate of 4.33%, and a 15 year rate of 3.37%. So almost a full point apart. If the monthly payment on the 15 year note was easily affordable without stretching, and I could save a full point, I would be inclined to go with the 15 year rate. But, it would require that I had sufficient emergency reserves in case I lost my job, and a general sense of confidence in my ability to continue earning the same or greater level of income for years to come.

 

[martyb]

Is this a stable career? Is it like working as an engineer at GE where he can expect to get laid off once every 30 years but not once every 3-5?

If he can make the payments, and if he isn't too worried about how big or expensive his house is, I'd steer him towards a 30-year mortgage.

He absolutely needs 8 months worth of expenses (including the mortgage payment) saved before buying.

He should try to put 20% down so he can avoid PMI.

He should try to get a mortgage rate locked in sooner rather than later.

He may want to consider a credit union, which won't treat him any more unfairly than a bank, but will likely offer lower closing costs.

Congratulations to you and your son.

I recently (1 1/2 months ago) bought a house. I've been a member of a federal credit union for over 20 years. I got a better interest rate and lower closing costs and much faster closing through a local (not a big-name) bank. I also have experience as a realtor for a national (Century 21) company in the local area where we bought our house. Just my 2 cents but I reccommend taking a hard look at the banks in his area, not just going with whoever he currently banks with. I did a VA loan (the 2nd one in my life) with only 10% down (no PMI on a VA loan) and got a 4.25 when my credit union was only offering 4.875. Also the banker pushed my loand to close in just 11 days, from start to finish! The CU person estimated a month. Your son's best ally may come in the form of the realtor. I know some may laugh at that statement. He needs to remember that EVERYTHING is negotiable, and to pursue the deal with that thought in mind.

Make sure he shops around for financing....and that he takes careful notes to compare among the lenders. Often times lenders will compete for your business, in the form of reduced or even waived fees, lower interest rates, lower or no "points" etc. Make them earn your business.

 

[ziggy29]

I don't know that I've ever seen the spread between 15- and 30-year loan rates this high. I'm used to seeing 30-50 basis points or so, not a full 100 basis points. That would make me more inclined to take the 15 if I felt pretty secure I had the cash flow to handle it and other household emergencies.

 

[Al in Ohio]

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. After 15 years the latter 2/3rds of a career were prime wealth building years.

I'd advise him on a 15 year which forces one to lean to LBYM early on and then make it a habit.

I had a 20 year mortgage myself. They do have those ya know! I got a 20 year fixed and paid it off a year early. I got a lower rate than a 30 and put 20% down to avoid PMI also.

 

[IlliniProgrammer]

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. After 15 years the latter 2/3rds of a career were prime wealth building years.

I'd advise him on a 15 year which forces one to lean to LBYM early on and then make it a habit.

I had a 20 year mortgage myself. They do have those ya know! I got a 20 year fixed and paid it off a year early. I got a lower rate than a 30 and put 20% down to avoid PMI also.

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.
3.) Interest rates are at 4% on a 30-year mortgage. That is less than the historical rate of inflation. If you think homeowners are getting tricked by corporate greed, you haven't been looking at interest rates.

So, you're welcome for the 4% interest rates on 30-year-mortgages and the new products designed to lower your risk.

Have a nice day!

 

[IlliniProgrammer]

I recently (1 1/2 months ago) bought a house. I've been a member of a federal credit union for over 20 years. I got a better interest rate and lower closing costs and much faster closing through a local (not a big-name) bank. I also have experience as a realtor for a national (Century 21) company in the local area where we bought our house. Just my 2 cents but I reccommend taking a hard look at the banks in his area, not just going with whoever he currently banks with. I did a VA loan (the 2nd one in my life) with only 10% down (no PMI on a VA loan) and got a 4.25 when my credit union was only offering 4.875. Also the banker pushed my loand to close in just 11 days, from start to finish! The CU person estimated a month. Your son's best ally may come in the form of the realtor. I know some may laugh at that statement. He needs to remember that EVERYTHING is negotiable, and to pursue the deal with that thought in mind.

Make sure he shops around for financing....and that he takes careful notes to compare among the lenders. Often times lenders will compete for your business, in the form of reduced or even waived fees, lower interest rates, lower or no "points" etc. Make them earn your business.

Good point. It's always important to shop your mortgage. Most homebuyers remember to shop from banks, but a lot forget to shop credit unions.

From what I have seen in shopping for mortgages, credit unions are about as competitive as local banks on rates, but they sometimes do a little better on closing costs. Other people I've spoken to have seen that too. You may have had a different experience, which is why it's so important to shop your rate. I am a little more hesitant to recommend mortgage brokers- I've heard stories of people getting screwed on terms at closing.

 

[RunningBum]

What are the prospects that he'd stay in the place for a long time? If it is pretty good, I think today's low interest rates are going to be looking darned good in the future, so I'd like to lock into a long term fixed rate--30 years.

However, most people, especially younger ones, don't live in the same place that long. 5-7 years is more common. None of my first 4 mortgages went 7 years. In that case, I'd go with the 15 if it's not a burden, with the spread between 15 and 30 year rates this high.

 

[Walt34]

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.

 

[rodi]

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.

 

[SJ1_]

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.

 

[Al in Ohio]

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.

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

 

[harley]

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

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.